A quick guide to the Super changes in the 2017 budget prepared with the help of our ‘Super Expert’ friends at Mercer.
‘Fairness’, ‘security’ and ‘opportunity’.
That is how Treasurer Scott Morrison characterised his second Budget, announced overnight. More favourable global economic conditions meant a move away from the headline focus of ‘budget repair’ seen in previous years.
Last year, we saw the biggest shake-up to super in a decade, with changes reinforcing that the purpose of superannuation is to ‘provide income in retirement to substitute or supplement the Age Pension’. This year, super is being used as a tool to tackle housing affordability and supply. Obviously, a year is a long time in the politics of budgets!
Using super to boost savings for first home buyers
The ‘First Home Super Savings Scheme’ uses the tax advantages of super to help those entering the property market. From 1 July this year, first home buyers can contribute pre-tax earnings into their super fund up to a total limit of $30,000, and $15,000 in any one year.
Keep the $25,000 limit on yearly concessional contributions in mind. This limit includes your 9.5% employer contribution, and may impact the amount you can contribute. NOTE: Your 9.5% employer contributions cannot be allocated to your ‘First Home Super Savings’.
|Concessional contributions yearly limit||First Home Super Savings Scheme yearly limit|
First Home Super Savings Scheme
|First Home Super Savings Scheme yearly limit||First Home Super Savings Scheme lifetime limit|
These contributions and the earnings they generate are taxed at the favourable rate of 15%, and when you purchase your first home, can be withdrawn to help fund the deposit.
Withdrawals – which can be made any time after 1 July 2018 – will be taxed 30% below your marginal tax rate. Government estimates suggest this scheme will accelerate savings on a typical deposit by ‘at least 30%’.
Couples saving for a home can contribute up to $60,000 between them to help reach their deposit goal.
To understand how the scheme can work, let’s look at the government’s case study:
Michelle earns $60,000 a year. Using the scheme she salary sacrifices $10,000 of her pre-tax income into her superannuation account, boosting her balance by $8500 after the 15% contributions tax. After three years, she can withdraw $27,380 plus earnings on those contributions, paying tax of $1620, leaving her with $25,760 for her deposit. That works out to about $6240 more than if she had saved in a standard deposit account.
Richard Ebbs, the Financial Advice Leader with our friends at Mercer, says the scheme may have the added benefit of engaging more people, particularly younger members, with their super.
“Using an existing structure like super has allowed the Government to avoid creating any extra complexity – and that’s definitely a good thing,” Ebbs says. “For the vast majority of first home buyers this would be a very suitable method of saving for that all important first home deposit.”
The new rules take effect from 1 July 2017 and withdrawals will be allowed from 1 July 2018. Money withdrawn must be used to fund a first home deposit.
Super incentive for boomers to downsize
At the other end of the housing chain, super is again being used as the incentive to encourage homeowners aged 65 and over to trade down to a smaller home. Encouraging empty nesters to ‘right-size’ aims to free-up housing stock that can have a knock-on impact down the chain.
Boomers will be able to make a non-concessional contribution of up to $300,000 from the sale of their principal residence into their superannuation fund, so long as they have lived in their home for at least 10 years.
The downsizing contributions will not count towards the existing contribution caps and home-owning couples will be able to take advantage of the measure from the same home to transfer up to $600,000 into super. There’s also no requirement to meet the work test or the $1.6 million balance test.
Richard Ebbs says the scheme is “an interesting development” but warns retirees to approach it with caution.
“They need to be careful about it because there could be Centrelink implications,” Ebbs says. “Your principal place of residence is not counted against the assets test but if you sell it and put it in super, then it will now be included in the assets test and may impact your Centrelink payments.”
Superannuation changes FOR 1 July, 2017 – RECAP
As mentioned above, superannuation underwent significant changes in the 2016 budget, and many of those changes are coming into effect from 1 July 2017. For a recap on these changes and how it may impact you, refer to our article, New superannuation rules, new strategies.
Other budget announcements
On the property front, individual property investors will have access to greater tax incentives to pour money into low cost housing.
From 1 January 2018, the capital gains tax discount for individuals investing in “affordable” residential property will increase from 50% to 60%.
To qualify for the extra discount, the housing must be provided to “low or moderate” income tenants and the rate of rent being charged must be at a discount to the market rate. The housing must also be managed through a registered community housing provider, and be held for at least 3 years.
Richard Ebbs says the scheme could attract certain investors such as those with a socially responsible ethos, but it’s not a simple proposition.
“The extra discount on capital gains is considerable and that might provide added incentive to invest,” Ebbs says, “but like any investment you’ve got to weigh up other factors such as the likely yield, future resale value and whether it complements your other investments.”
Big Four Banks new Tax
The Big Four banks plus Macquarie are also being hit with a new tax. Treasurer Scott Morrison said the tax was designed to generate a “fair contribution from our major banks, similar to measures imposed in other advanced countries” and would “even up the playing field for smaller banks”.
One potential effect of the tax is likely to be reflected in the banks’ charges to customers in the form of increased home loans rates or other fees and charges.
Medicare gets another mention this year at budget time – with the Medicare Levy set to increase for most tax payers. The levy is set to increase by 0.5 percentage points — from 2 to 2.5 per cent of taxable income from 1 July 2019.
Other tax rates that are linked to the top personal tax rate, such as the fringe benefits tax rate, will also be increased.
The levy will be reduced for some taxpayers. Income thresholds where the Medicare Levy kicks in will increase, so more people on low incomes will pay no Medicare Levy or a reduced level. These increased thresholds will apply for the current financial year onwards.
|Family||$36,001 plus $3,306||$36,541 plus $3,356 per child|
|Family Pensioner||$46,966 plus $3,306||$47,670 plus $3,356 per child|
*At the time of writing, the 2016/17 rates for Medicare Levy thresholds that would apply under existing legislation have not been announced.