In the Tax Institute’s Member Newsletter: TaxVine No. 19 (3.6.22) Kym Bailey, CTA, Chair of The Tax Institute’s National Superannuation Technical Committee (Committee), recaps on the changes to superannuation effective from 1 July 2022 and summarises the key priorities for the Committee over the coming year.
In the last weeks of the previous government, several superannuation changes were legislated with a commencement date of 1 July 2022. These are all positive changes that help loosen up some of the complexity that was imbedded by the significant changes from 1 July 2017. The Committee welcomes the changes but consider there is more to do to simplify the system and remove the grey areas that currently exist.
New law from 1 July 2022
Removal of work test
Perhaps the biggest change is the removal of the work test for some contributions for those aged 67 to 74 years.
From 1 July 2022, non-concessional contributions (NCC), as well as salary sacrifice contributions, can be made until age 75 regardless of the individual’s employment status. The usual restrictions still apply to limit NCC in conformance with the total superannuation balance (TSB) rules. However, where there is capacity to make NCC, having regard to the individual’s TSB, they can utilise the bring forward opportunity and make up to three years’ worth of NCC in the one year or spread them over two or three years.
Importantly personal concessional contributions remain subject to the work test for those aged 67 to 74 years. The work test requires gainful employment of at least 40 hours in a consecutive 30-day period at some stage in the year in which the contribution is being made.
The downsizer contribution is a category of contribution that has very few restrictions including no need to satisfy the work test and can even be made after age 75 (SIS Regulation 7.04).
Until 30 June 2022, the ability to make a downsizer contribution is restricted to individuals over age 65; from 1 July 2022, the eligibility age drops to 60.
Eligible individuals in the process of selling a property that is at least partially exempt under the CGT main residence exemption can utilise the downsizer contribution, provided settlement occurs within 90 days of the individual’s 60thbirthday and this occurs after 30 June 2022.
The election promises from both major parties included a commitment to reduce the eligibility age to 55. This would further expand the opportunity should it be passed into law.
Income threshold for SG eligibility removed
From 1 July 2022, employers are required to pay SG contributions for all employees regardless of the level of their income. This removes the minimum income threshold that required employees to earn at least $450 in a month to be eligible for super contributions.
This also means, from 1 July 2022, employers must pay SG on payments they make to an employee aged under 18 years if they work for the employer for more than 30 hours in a week, regardless of how much they are paid.
Commutation for certain legacy pensions
This change is focused on providing individuals with the opportunity to remove a ‘permanent excess’ in their transfer balance account (TBA) that was caused by the changed valuation methodology for market linked income streams (MLIS).
In summary, pensions commenced prior to 1 July 2017 were valued via a formula as they were defined as a capped defined benefit income stream (CDBIS) for the purposes of the TBA entries. In contrast, the valuation for MLISs that commenced on or after 1 July 2017 is as per the market value at commencement. The mismatch of valuation methodologies has led to some individuals having a permanent excess in their TBA as the terms of the pension do not permit commutation except in very limited circumstances.
Affected individuals can now partially commute their MLIS to reduce the excess in their TBA. Care is required as the commutation can occur only following the issue of a commutation authority by the ATO.
Minimum pension drawdown rates
The halving of the minimum pension drawdown rates has been extended by 12 months to include the 2022–23 financial year.
Priorities for the Superannuation Committee
The legislative amendment to allow the partial commutation of MLIS was welcomed by the Committee and we provided input into the form of the final provisions. However, we are more focused on the progression of the Federal Budget 2022–23 measure that proposes to allow all legacy pensions to be commuted to an accumulation account.
This measure was not introduced in a Bill before Parliament was prorogued ahead of the recent Federal election so we may need to start from scratch to bring this to the new government’s attention. It is a pressing issue for many SMSFs as the choice to restructure member superannuation to an APRA-regulated fund is not available where a legacy pension is on foot. For individual members, their flexibility to access capital for capital outlays such as aged care accommodation is not available, and there are complex succession issues associated with these pensions.
Transfer balance cap
Another area of the Committee’s focus is on the unnecessarily complex indexation methodology to increase an individual’s personal TBC. The general TBC limits the amount a person can hold in the tax-free retirement phase of superannuation at $1.6 million for pensions from 1 July 2017 to 30 June 2021 and $1.7 million since 1 July 2021. If an individual had commenced a pension in the first tranche, but not used up all their $1.6 million cap, they can partially index their cap but not for the full $100,000 of the indexation value. With the TBC system only into its fifth year, there is already a myriad of personal TBCs in the system despite there being only one round of indexation to date. The plethora of personal TBCs will increase exponentially over time. This level of complexity weighs down efficiency in the system and acts as a trip rope for the unsuspecting superannuant.
Non-arm’s length income (NALI)
The Committee is firmly focused on the uncertainty caused by the ATO’s interpretation of the NALI provisions as detailed in LCR 2021/2 (LCR).
Section 295-550(b)(c) of the Income Tax Assessment Act 1997 provides for expenses incurred at less than market value to fall under the NALI provisions. While this is likely to be the correct interpretation for specific assets, as it currently stands, the LCR takes the view that a non-asset tagged non-arm’s length general expense (such as accounting fees, advice fees for less than market or nil, for example) can taint all the income of the fund and trigger a NALI assessment. Unfortunately, the LCR does not provide clarity as to the boundaries of the application of the NALI provisions to general expenses.
NALI is not a compliance issue but a tax rate application that results in the superannuation fund’s income being taxed at the top marginal tax rate.
The former Minister for Superannuation, Senator Jane Hume, announced on 22 March 2022 that the Morrison Government intended to make legislative changes with effect from 1 July 2022 to ensure the NALI provisions operate as envisaged. This uncertainty requires a legislative fix which the Committee continues to pursue.
Superannuation Guarantee (SG)
The SG legislation is an area of perennial concern for the Committee. It is overly complex and showing its age as belonging to an industrial relations environment that is no longer reflective of contemporary working arrangements. None more so than the extended definition of ‘employee’ under section 12(1) of the Superannuation Guarantee (Administration) Act 1992 whereby a person may be engaged as a contractor but deemed to be an employee for SG purposes. Over time, the likelihood of being a ‘deemed employee’ has been expanded by case law where a multi-factorial interpretation has been confirmed by the judiciary.
Recent cases provides a reversal of this trend with the High Court confirming the primacy of the terms of the contract: see CMFEU v Personnel Contracting  HCA 1 and ZG Operations v Jamsek  HCA 2. For now, though, the question of applying the extended definition of an employee for SG purposes remains legislatively enshrined and the Committee continues to monitor the issue.
Finally, the administrative process around SG compliance remains another focus area for the Committee. The penal rate of the Part 7 penalty, the unfair calculation of the nominal interest component and the lack of Commissioner’s discretion are just some of the reasons that a review and reform of the SG regime is warranted.
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