This years Federal Budget consisted of a large number of significant changes being made to superannuation. If they are successfully passed by Federal Parliament, these changes are set to apply from the 1st July 2022 after the date they receive Royal Asset.
50 Percent Reduction In Minimum Pension Extended To 30th June 2022
Although this is not included in the 2021 Budget, the Australian Government has announced that the temporary 50 percent reduction in minimum annual amounts for superannuation pensions will be extended for a further year to 30th June 2022. The 50 percent reduction was originally introduced in March 2020 in the Government’s economic response to the covid-19 pandemic
Work Test Abolished To Age 74 For Some Contributions
Under the current law, a super fund is unable to legally accept a contribution other than a mandatory employer contribution from or on behalf of a person over the age of 67 unless the person has met the “work test” in that year. To meet the work test, a person is required to be gainfully employed or self-employed for at least 40 hours in a continuous 30 week period during the year.
The Australian Government has announced that the work test will be removed for non-concessional contributions and salary sacrifice contributions made by or on behalf of people up to the age of 74. The work test will continue to apply to personal concessional (deductible) contributions up to the age of 74.
There are some types of contributions that are specifically excluded from being tested under the non-concessional contributions cap, such as small business CGT contributions and payments in relation to structured settlements. It is not clear if the work test will be removed in relation to these contributions.
Non-Concessional Contributions Cap Bring Forward Extended To Age 74
Under the current law, an Australia must be aged 65 or under at some time in the year the bring forward is triggered. The Australian Government has previously announced its intention to raise this limit to age 67, but this is yet to be legislated. It is now proposed to raise this limit to 74. So, we have the situation that the limit will probably be age 65 until 1st July 2022, when it is anticipated that the age will rise to 74.
The Abolition of $450 Threshold For Super Guarantee
The current $450 per month income threshold under which an employer is not mandated to pay super guarantee contributions for an employee, will be abolished. As a result, all employees will receive employer super contributions from the first dollar of salary or wages.
This change is intended to benefit part-time casual workers. Once the change becomes effective, employers will have to obtain the choice of super fund or stapled super fund details for the affected workers.
Eligibility For Downsizer Contributions Reduced From 65 to 60
Downsizer contributions were first introduced on 1st July 2018. At the present time, a person must be aged over 65 in order to make a downsizer contribution. This threshold is to be reduced to the age of 60. No other conditions, such as the ability to make only one downsizer contribution in their lifetime, are being changed, but this does mean that a downsizer contribution can be made earlier.
Residency Requirements For SMSM Members Overseas
Under the current law, in order to qualify for tax concessions a super fund must meet a residency definition, which requires it to meet three tests at all times:
- the fund must either have been established in Australia or any asset of the fund must be situated in Australia;
- the central management and control of the fund must be ordinarily in Australia, and
- the fund must pass an active member test.
The first test is easy to satisfy, but the central management and control and active member tests can pose problems where one or more members of the fund are overseas.
The central management and control test mandates that the strategic and high-level decision making of the fund is ordinarily in Australia. Central management and control could be exercised outside Australia at times, provided this is only temporary. Whether central management and control are only temporarily outside Australia is a question of fact. Perhaps as an indication of what period of time might be reasonable, the law contains a provision that allows central management and control to be considered to be in Australia even if central management and control are actually temporarily outside Australia for a period of not more than 2 years. The under the soon to be implemented changes the 2-year period is set to be extended to 5 years.
The active member test requires that either:
- the fund has no active members (members are making or intending to make contributions or rollovers into the fund); or
- at least 50% of the total value of the balances of active members belongs to Australian tax residents.
Funds can fail the active member test if, for example, contributions are made by or on behalf of members who are resident outside Australia for tax purposes and whose balances represent more than 50 percent of the value of the fund.
The Australian Government plans to remove the active member test altogether. This will be a welcome change for many Australians.