2022-2023 Federal Budget

Superannuation and Retirement summary

We have summarised key outcomes from the 2022-2023 Federal Budget, focusing on changes that impact Superannuation Advice and Retirement Planning. Here’s what you need to know:

THE BAD

Off-market share buy-backs to be treated as on-market buybacks

When: Immediately (7:30pm on Budget night - 25/10/2022)

Companies can invite shareholders to sell their shares back to the company by way of a tender process. The catch to the “off-market buyback” was that the proceeds received by shareholders from the sale of their shares were not treated as capital as one would expect, (which is how an “on-market buyback” or a usual share sale is generally treated). Rather, a large component was treated as a dividend, which attracted franking credits. The remainder of the sale proceeds were treated as a capital component. Due to the tax attractiveness of these offers (for low tax-payers: see example below), shareholders would be willing to sell their shares back at a discount to the market price. Generally, the maximum discount of 14%. This could result in a win-win for both the company and the investor.

Consider the example of tendering shares worth $100/share at a 14% discount:

As illustrated in the table above, these buybacks generally resulted in a large tax arbitrage and return for our clients in a low to no tax environment, and were generally unattractive to taxpayers on a marginal tax rate of more than 21%. Note:
Individuals in the Account Based Pension phase of superannuation do not pay any tax on income or capital gains, and therefore receive buyback proceeds tax-free with a full refund of franking credits. People in the pension phase of super would enjoy a 19% return on an off-market buyback using the assumptions above
Individuals in the Accumulation phase of Superannuation pay 15% tax on income and therefore are taxed on receiving buy-back proceeds. However, depending on the cost base of the shares tendered, these individuals may receive a tax benefit as a result of realising a capital loss and be in an overall profit from this transaction.

THE GOOD:

1) Providing clarity on previously unlegislated Self Managed Superannuation Fund (SMSF) proposals:

Relaxation of the residency requirements for SMSFs. These rules were previously targeted to commence 1 July 2022 by the Morrison Government. They are now planned to commence on the income year commencing on or after the date of Royal Assent of the enabling legislation.
Removing the previous proposal to allow some SMSFs to change from an annual audit to a three year audit cycle. This was originally proposed in the FY19 Budget but was yet to be legislated.

2) Decreasing the age from 60 to 55 for Superannuation Downsizer Contribution eligibility:

When: Start of the first quarter following Royal Assent

A downsizer contribution allows individuals (subject to certain eligibility criteria) to contribute $300,000 (or $600,000 for a couple) into Superannuation using the proceeds from the sale of their home, circumventing the current Total Super Balance (TSB) restrictions and non-concessional contribution caps.

3) Increasing the income test thresholds for the Commonwealth Seniors Health Card (CSHC) to $144,000 for couples and $90,000 for singles.

When: 7 days after Royal Assent

This increase in thresholds allows the broad majority of people to be eligible for the Commonwealth Seniors Healthcare Card (CSHSC).

Using current deeming rates, the new thresholds allow couples with $6,496,000 and singles with $4,206,800 of assets excluding your home to qualify for this card.