Updated Federal Budget October 2022-23: Australia’s second budget for the year
By Colin Lewis, Head of Strategic Advice, Fitzpatricks Private Wealth
What with a new Government facing hard choices having inherited significant budgetary challenges in an environment of global and domestic economic uncertainty, it’s not surprising there was keen interest in this Budget.
While at first glance Tuesday’s Budget seemed low-key, there are a number of important measures that will affect retirees, self-funded retirees, downsizers and self-managed super funds (SMSFs).
But with the Treasurer to hand down another budget in May next year – before the 2023-24 financial year – it may well be that the Government kicked the can down the road on having to make some difficult decisions.
So, it’s a matter of waiting until the Government’s next budget to know with certainty whether we’re off the hook with the unpalatable changes rumoured in the lead-up to this Budget.
Thankfully, the Government did not meddle with super.
Prior to the Budget, there were rumours that the maximum amount an individual could have in super would be limited to $5 million, that indexation of the transfer balance cap – and thus total superannuation balance (TSB) – would be frozen given recent movements in the consumer price index (CPI) and SMSF limited recourse borrowing arrangements would be abolished or changed.
Fortunately, none of these rumours came to fruition.
However, the Government did confirm its election commitment to extend access to downsizer contributions.
Extending access to downsizer contributions
From the start of the first quarter after this measure becomes law, the minimum age for making a downsizer contribution will reduce from 60 to 55 years of age.
Whilst this change may allow people to get more into super earlier, a downsizer contribution is of most benefit to someone otherwise ineligible to contribute. That is a person aged 75 or more, or someone with a TSB that prevents them from either making non-concessional contributions (because their TSB is $1.7 million or more), or using the non-concessional contribution bring-forward rule (because their TSB is $1.59 million or more).
Everyone else has time on their side to get the sale proceeds from selling their home into super with no work test applying to age 74.
Legacy superannuation measures
The Treasurer also provided certainty on some unlegislated measures announced by the previous Government.
Still on the table
The start date of the 2021-22 Budget proposal to relax the residency requirements for SMSFs is being deferred from 1 July 2022 to the income year commencing from the date this measure becomes law.
This measure extends the central management and control test safe harbour from 2 to 5 years for SMSFs and removes the active member test for both SMSFs and small APRA funds (SAFs).
It will allow SMSF and SAF members to continue contributing to their preferred fund whilst temporarily overseas – ensuring parity with members of large APRA-regulated funds. These members will have the flexibility to keep and continue contributing to their own fund while undertaking overseas work and education opportunities.
Off the table
The Government is not proceeding with the 2018-19 Budget measure that proposed changing the annual audit requirement for certain SMSFs. The annual audit requirement was to change to a three-yearly audit cycle for SMSFs with a history of three consecutive years of clear audit reports and that had lodged annual returns on time. This is now not happening.
Didn’t rate a mention
Unfortunately, there was no mention of the proposed two-year legacy pension amnesty allowing people locked in market-linked income streams (term allocated pensions and annuities) and complying lifetime and life-expectancy pension and annuities, to get out of them.
Also, there was no word on the former Government’s controversial non-arm’s length income & expenses (NALI and NALE) measures.
Improving the integrity of off-market share buybacks
From Budget night, a loophole used by listed public companies to stream franked dividends to shareholders in off-market share buybacks will be shut down. That is, companies will be restricted from paying franked dividends to shareholders when returning capital.
In the past, many of Australia’s largest companies implemented off-market buybacks as an effective way of returning capital to shareholders and in the process used fully franked dividends as a large component of the payment. This made it extremely attractive to low-taxed super funds, including SMSFs, as it maximised the receipt of refundable franking credits whilst limiting any capital gains tax.
In future, when investors, including SMSFs, sell their shares to a company, it will be a capital gain transaction – consistent with on-market share buybacks.
Digital currencies not foreign currency
The Government confirmed that digital currencies continue to be excluded from the income tax treatment of foreign currency. Bitcoin and other cryptocurrencies are taxed as an asset, not a currency.
This measure has already been released in draft legislation.
By way of background, this maintains the current tax treatment of digital currencies, including their capital gains tax treatment, where held as an investment. It removes uncertainty following the decision of the Government of El Salvador to adopt Bitcoin as legal tender and will be backdated to income years that include 1 July 2021.
Apart having important personal and business tax implications, it impacts SMSFs that invest in digital currencies.
Penalty unit increase
From 1 January 2023, the amount of the Commonwealth penalty unit will increase from $222 to $275. The nearly 24 per cent increase will apply to offences committed after the legislation comes into play.
This amount is indexed every three years in line with the CPI, so it’s likely there will be another increase to the value of a penalty unit with indexation next occurring on 1 July 2023.
This means that getting it wrong will be far more costly for SMSF trustees.
Super law imposes penalties for breaches of the superannuation rules that range from 5 to 60 penalty units.
At $275 per unit, penalties range from $1,375 (5 units) to $16,500 (60 units) per member. So, if you have an SMSF with say two individual trustees, you could face a penalty of up to $33,000.
Four mortal sins attract the highest 60-unit penalty – breaching the no lending to members or relatives rule, contravening the borrowing rules, breaching the in-house asset rules and failing to notify the ATO of significant adverse events.
Breaching operating standards attracts 20 units.
Failing to keep proper minutes and records or inform the ATO of change of trustees or directors attracts 10 units.
Failing to comply with an education direction or failing to provide required information to the ATO attracts 5 units.
Incentivising pensioners to ‘downsize’
The assets test exemption on the sale proceeds of a principal home will be extended from 12 months to 24 months for income support recipients.
In addition, the income test will be changed so that the lower deeming rate only (currently 0.25 per cent) will apply to the sale proceeds when calculating deemed income for 24 months after the home is sold.
Obviously, this gives pensioners more time to find a new home without jeopardising their pension.
Incentivising pensioners into the workforce
Age and Veterans Pensioners will receive a one-off credit of $4,000 to their Work Bonus income bank.
This temporary income bank top-up increases the amount pensioners can earn in 2022-23 from $7,800 to $11,800 before their pension is reduced.
This supports pensioners who want to work, or work more hours, to do so without losing their pension.
Freezing deeming rates
Deeming rates will be frozen at their current levels for a further two years until 30 June 2024.
This is to support people who rely on income from deemed financial investments, as well as the pension, to deal with the rising cost of living.
Lifting the income thresholds for the Commonwealth Seniors Health Card (CSHC)
The good news for self-funded retirees is the Government is continuing with the previously announced increase to the income thresholds for the CSHC.
The income thresholds will increase from $61,284 to $90,000 for singles and $98,054 to $144,000 (combined) for couples.
This card is income-tested only – no assets test applies.
Together with the freeze on deeming rates which apply to account-based pensions owned by cardholders (unless they are ‘grandfathered’ pensions held by cardholders before 1 January 2015 where no income counts), it means a lot more self-funded retirees will qualify for the CSHC. It also means that existing cardholders can be more aggressive with their investments to earn extra income without fear of losing the card.
From 1 January 2023, the general patient co-payment for treatments on the Pharmaceutical Benefits Scheme will decrease from $42.50 to $30.
*The information in this document (information) has been prepared by Fitzpatricks Private Wealth Pty Ltd (ABN 33 093 667 595, AFSL 247 429) (Fitzpatricks). The information is of a general nature only and does not take into account the objectives, financial situation or needs of any person. Before acting on the information, investors should consider its appropriateness having regard to their own objectives, financial situation and needs and obtain professional advice. No liability is accepted for any loss or damage as a result of any reliance on the information.