Budget 2021-22 and superannuation changes
The 2021-22 budget includes significant superannuation reforms, including changes to the work test, downsizer contribution and pension loans scheme (PLS). Below are the highlights:
Work test scrapped
The work test has been scrapped, with people aged between 67 and 74 no longer required to meet the work test when making or receiving non-concessional or salary sacrificed superannuation contributions.
The SMSF Association CEO John Maroney welcomed the budget measures. “In our 2021 Federal Budget submission, we advocated for reforms to the residency rules for SMSFs and for an amnesty period to allow SMSF members stuck in legacy pensions to convert to more conventional style pension products, and we are pleased both measures are included in this year’s Budget.”
Commenting on changes to the work test, Maroney said, “It means individuals who may have previously been unable to top up their retirement savings because they are no longer working may soon be able to do so.”
“In addition, members aged 67 to 74 years will also be able to bring forward their non-concessional contributions in the same way that someone under the age of 65 can do.”
The minimum age for the downsizer contribution has been lowered from 65 to 60, allowing Australians nearing retirement to make a post-tax contribution of up to $300,000 per person when they sell their family home.
“Contributing the allowable proceeds from the sale of a dwelling that qualifies as a main residence for the downsizer provisions has proven to be a popular strategy for individuals who are 65 or over,” said Maroney.
The move offers more flexibility to members to top up their retirement savings. “This is particularly useful in a low contribution cap environment,” he said.
“Regarding residency rules, we argued in our submission that the existing two-year safe harbour exemption under the central management and control test is too short in the context of modern work arrangements, where executives and other staff are often expected to commit to an overseas placement for more than two years, and that this period should be increased to five years,” said Maroney.
An extension to five years was announced in the budget, as well as the removal of the active member test that was also one of our recommendations, he added.
“The removal of the active member test significantly simplifies the residency rules for both SMSFs and small APRA funds,” said Maroney.
Maroney also welcomed the government’s decision to abolish the $450 monthly Superannuation Guarantee threshold which will benefit many lower paid employees, especially women in casual and part time employment.”
PLS, lump sums, pensioners and self-funded retirees
The 2021-22 budget makes the Pension Loans Scheme (PLS) – a voluntary, reverse mortgage type loan – more attractive and flexible. The Scheme allows eligible people to supplement their retirement income by borrowing against the equity in their property.
The government will introduce A No Negative Equity Guarantee, which will mean that borrowers, or their estate, will not owe more than the market value of their property, in the rare circumstances where their accrued PLS debt exceeds their property value. The move brings the PLS in line with private sector reverse mortgages.
The budget will allow a full-rate age pensioner to access their entire annual PLS amount as a lump sum. This is on top of receiving a full-rate Age Pension. Those with a part-rate Age Pension will also be able to access a lump sum worth 50 per cent of a full Age Pension.
Under the existing PLS, eligible self-funded retirees can get an income boost over a year worth 1.5 times a full rate Age Pension payment. This represents around $37,155 a year for singles and around $56,011 a year for couples.
The changes from 1 July 2022 will allow a self-funded retiree to get a lump sum payment worth up to 50 per cent of a full rate Age Pension, representing around $12,385 per year for singles and around $18,670 for couples under the PLS each year.
Those with a part-rate Age Pension will also be able to access a lump sum worth 50 per cent of a full Age Pension.
A word of caution
Lastly, Maroney cautions SMSF investors and advice professionals from acting on any of these measures before they have been passed into law. Other than the announcement relating to legacy pensions, the new measures are expected to start from 1 July 2022.