2023 Federal Budget - Superannuation and Taxation

From a Superannuation perspective, the May 2023 Budget included minor changes, but largely lacked clarity on previously mentioned proposals. Below is a summary of changes that were announced, along with changes from previous budgets that we await clarity from:

Halving of minimum pension rates - no extension announced

There was no announcement of any extension to the halving of Account Based Pension and Term Allocated Pension minimum pension withdrawal rates.

For background, minimum pension withdrawal rates were halved from 1 July 2019 as part of the response to COVID19. Unlike the time minimum pension rates were halved during the GFC, there was no mention of a transition back to full rates. This will effectively result in minimum pension withdrawal rates doubling from 1 July 2023.

Strategies

Investors with Total Superannuation Balances of less than $1.9m and under the age of 74 may contribute these withdrawals back into Superannuation and move funds back into the Account Based Pension / retirement income stream phase of Superannuation.

Transfer Balance Cap indexation confirmed at $1.9m

During the post-election budget, it was announced that the Transfer Balance Cap would be indexed up from $1.7m to $1.9m. Since then, there has been rumours that the Labor government would freeze this cap at $1.7m. These rumours did not eventuate.

Strategies

People about to start Account Based Pensions / Retirement Income Streams for the first time may consider deferring the commencement to 1 July 2023 to receive a higher personal Transfer Balance Cap and not be subject to the proportional indexation rules and complexities.

Commutation of legacy non-commutable income streams - no implementation announced

During the May 2022 Budget, the Liberal Government proposed a two-year timeframe allowing income streams such as Term Allocated Pensions / Market-linked income streams, Complying lifetime income streams, and Complying life expectancy income streams to be commuted back to current day/vanilla Superannuation phases such as the accumulation phase or Account Based Pension phase of Superannuation. The original proposal was to allow this window to commence from 1 July 2023. Unfortunately, this was not legislated before the change of government and there was no mention of support for this proposal during the 2023 Budget.

Requirement for Employers to pay Superannuation Guarantee payments at the same time as salary payments.

From 1 July 2026, Employers will be required to remit Superannuation Guarantee payments at the same time salaries are paid. Currently, employers are only required to pay superannuation quarterly. There was no mention of whether this would impact current Maximum Superannuation Contribution Bases, which is the maximum salary an employer is liable to pay Superannuation Guarantee upon. Currently, this a quarterly figure.

Additional 15% Tax on Superannuation Balances greater than $3m (“$3m super tax”) - No further detail or clarity. No indexation announced.

The Labor Government previously announced a new measure to effectively tax the proportionate earnings on Superannuation balances above $3m at 30% rather than 15% currently. The Budget lacked clarity on many unresolved and criticised issues with this proposal, including but not limited taxing of unrealised capital gains and indexation of the $3m limit.

This measure is proposed to take effect from 1 July 2025.

Strategies

You may consider withdrawing money close to the end of the financial year to lower your TSB starting point in the proposed formula, which may result in a lower proportion of your earnings being attributed to your balance over $3m. Note that you may not be eligible to re-contribute these funds as a non-concessional contribution due to the $1.9m TSB limit.

You may also consider the appeal of different tax structures such as your personal name, a Trust, or a company.

Self Managed Super Fund (SMSF) Non-Arm’s Length Income (NALI) and Non-Arm’s Length Expenses (NALE) penalties reduced

Self Manged Superannuation Funds (SMSFs) are penalised for receiving income or incurring an expense that is considered non-arm’s length. This is to discourage the artificial inflation or deflation of superannuation balances in attempt to target a desired balance or funnel income into a concessionally taxed environment.

Currently, when an SMSF incurs an expense that is less than the market rate (e.g. not arm’s length), it may effectively result in all of the fund’s income being taxed at 45%.

This new proposal limits the amount considered NALI due to incurring a NALE to 2x the expenditure breach. This was previously limited to 5x in the initial January consultation paper and has been revised downwards during the recent budget.

Stage 3 tax cuts - no amendments announced

The liberal government legislated the final stage of the 2019 tax cuts to come into effect from 1 July 2024. Whilst in theory this would imply that the stage 3 tax cuts will be implemented on 1 July 2024, it is important to note that there is one more Federal Budget (2024) to take place before these changes come into effect, and could be removed.

Removal of the Low to Middle Income Tax Offset (LMITO)

LMITO was a temporary tax offset introduced in FY19, providing a tax offset of up to $1,500. It applied to individuals with taxable income below $126,000 on a sliding scale.

Increasing the medicare levy exempt income thresholds

Individuals will now be exempt from paying the 2% medicare levy if their taxable income is less than $24,276, currently $23,365.

Broaden the 5% Home Guarantee Scheme eligibility

This scheme allows eligible individuals to purchase a home using a deposit of 5%, or 2% for single parents with a dependent child. This is achieved by the Government guaranteeing the balance of the security generally needed to settle on a loan without needing LMI (20%).

The Government has announced that you no longer need to be a first home owner to access this scheme so long as you have not owned a property for 10 years in Australia.

Additionally, two people can now use this scheme to purchase a home together, even if they are not spouses or in a de-facto relationship.