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FEDERAL BUDGET 2017: Superannuation

First Home Super Saver Scheme

Voluntary contributions to superannuation made by first home buyers from 1 July 2017 are going to be accessible for the purpose of a first home deposit. These voluntary contributions along with associated deemed earnings can be withdrawn. Withdrawals under the scheme are allowed from 1 July 2018.

The First Home Super Saver Scheme sets the limit on the amount of voluntary contributions that can be withdrawn for the purpose of a first home deposit — up to $15,000 per financial year and $30,000 in total over the taxpayer’s lifetime. Both members of a couple can take advantage of this measure to buy their first home together.

The proposal affects taxpayers who will purchase their first home and have made voluntary contributions of any type:

  • non-concessional contributions
  • personal concessional contributions, and
  • salary sacrificed contributions.

Note that mandatory employer contributions (currently at 9.5%) are not voluntary, and neither are contributions made under enterprise bargaining and similar agreements.

Note that this scheme does not allow any additional contributions to be made over and above the existing contribution caps.

Concessional contributions and deemed earnings that are withdrawn will be taxed at marginal rates less a 30% offset.  Non-concessional contributions withdrawn under the scheme will not be taxed but the deemed earnings on these contributions will be subject to tax at marginal rates less a 30% offset.

Voluntary superannuation contributions made from 1 July 2017 will be eligible for this measure. Withdrawals will be allowed from 1 July 2018.

The amount of deemed earnings that can be released together with voluntary contributions will be calculated using a deemed rate of return based on the 90-day Bank Bill rate plus 3%. The rate for the June 2017 quarter, for example, is 4.78%.

The withdrawn amounts under the scheme will not affect social security benefits, such as the Family Tax Benefit, HECS/HELP or other benefits.

The measure essentially provides a concessionally taxed environment for saving of funds to be used for a first home deposit. Rather than saving for the first home from personal income taxed at 32.5% or 37%, taxpayers will be able to salary sacrifice their income into superannuation to be taxed at 15%.

For instance, a taxpayer on a 37% marginal income tax rate saves $2,200 in tax by salary sacrificing $10,000. Upon withdrawal for the first home deposit, this taxpayer will need to pay $700 in tax (after the 30% offset) on the amount withdrawn. Therefore, the net benefit is $1,500 compared to a situation when the deposit is saved using only after-tax dollars.

The cap for non-concessional contributions for the 2017-18 financial year is $100,000. Only superannuation members with a total superannuation balance of less than $1.6 million as on 30 June 2017 are able to make any non-concessional contributions in the 2017-18 income year. Non-concessional contributions are not taxed in the superannuation fund.

The cap for concessional contributions for 2017-18 is $25,000. Individual taxpayers are able to deduct concessional  contributions they made for themselves. This deduction however, cannot result in a tax loss for the year. Concessional contributions form part of taxable income of the superannuation fund that is subject to a 15% income tax rate

Case study to explain the measure

Michelle earns $60,000 a year and wants to buy her first home. Using a salary sacrifice arrangement established on 1 July 2017, she annually directs $10,000 of pre-tax income into her superannuation account, increasing her balance by $8,500 after the contributions tax of 15% has been paid by her fund.

After three years, she is able to withdraw $27,380 of contributions and deemed earnings on those contributions:

3 years of $10,000 salary sacrificed contributions after contributions tax

of 15% ($8,500 x 3) ………………………….$25,500

plus

deemed earnings on the above amount accrued over three years (at a rate of

90-day Bank Bill rate plus 3%) ……………..$1,880

Michelle’s withdrawal is taxed at her marginal rate (including Medicare levy) less a 30% 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. 

Superannuation contributions from proceeds of downsizing

The government will allow a person aged 65 or over to make a non-concessional contribution of up to $300,000 from the proceeds of selling their home (which they are to have owned for 10 years or more). Such contributions will be exempt from:

  • the non-concessional contributions cap and $1.6 million total superannuation balance test
  • the work test
  • the age test.

Therefore, taxpayers with a total superannuation balance in excess of the general transfer balance cap, set at $1.6 million for 2017-18, as well as those over 65 and not working, and those aged over 75, will be able to make the proposed “downsizing” contribution of $300,000.

Both members of a couple will be able to take advantage of this measure for the same home, meaning up to $600,000 per couple can be contributed to superannuation through the downsizing cap. It will apply from 2018-19.

This proposal is part of the suite of Budget measures aimed at improving housing stock and affordability. This measure makes it easier for older people to sell their family homes after their children have moved out and downsize into a smaller property. The theory is that this will make more of these homes available for younger families to purchase.

Social security recipients, such as taxpayers receiving the Age Pension, should note that any change in the person’s superannuation balance as a result of this measure will count towards the Age Pension assets test. This means that pensioners will need to evaluate the impact of the downsizing contribution on their eligibility for the Age Pension.

Note also that the measure does not contain any increase in the ability to start additional pensions with the contributed amounts due to downsizing. The amount of funds transferred into pension phase is still limited to the person’s transfer balance cap, set at $1.6 million for 2017-18 financial year.

Case study to explain the measure

George and Jane, both retired and aged 76 and 69, sell their home to move into more appropriate accommodation. The sale proceeds are $1.2 million. They can both make a non-concessional contribution into superannuation of $300,000 ($600,000 in total), even though Jane no longer satisfies the standard contribution work test and George is over 75. They can make these special contributions regardless of how much they already have in their accounts.

Note in this example that George’s and Jane’s entitlement to Age Pension will be reassessed as their assets have increased by $600,000.

LRBAs and non-arm’s length income arrangements

The outstanding balance of a limited recourse  borrowing arrangement (LRBA) will now be included in a superannuation fund member’s annual total superannuation balance. The repayment of the principal and interest of an LRBA sourced from funds used to support the member’s accumulation account will result in a transfer balance credit in the member’s transfer balance account in cases where such repayment increases the value of the pension account.

Another measure is aimed at improving the non-arm’s length income (NALI) provisions. In deciding whether the transaction is entered into on a commercial basis, the costs that would normally apply to a commercial transaction would be included in consideration. Consequently, superannuation funds that avoid costs through non-arm’s length dealings will be subject to NALI rules. Any income that is found to be NALI is taxed at 47%.

The new LRBA rules will commence from 2017-18, and the changes to the NALI rules are to take effect from 2018-19.

The measure, aimed at improving the integrity of LRBAs, is a result of government’s concern that LRBAs can be used to circumvent contribution caps and effectively transfer growth in assets from the accumulation phase to the retirement phase that is not captured by the transfer balance cap.

The strengthening of NALI rules appears to be aimed at non-arm’s length transactions that result in a superannuation fund incurring significantly lower transaction costs compared to arrangements entered on a genuine commercial basis. Current NALI rules focus primarily on the amount of income derived from the nonarm’s length scheme.