2018-19 Federal Budget - superannuation

In brief

Written by Senior Associate Jo Ottaway and Senior Paralegal Breda Loughnane

The 2018-19 Federal Budget has introduced a number of proposed superannuation-related changes, with a focus on protecting small balances, young members and existing retirees. Reducing excessive fees and 'tailoring' insurance arrangements are central to the proposed changes, with measures requiring a cap on passive fees and an 'opt-in' insurance framework for certain members. Significantly, a 'retirement income covenant' measure will also be introduced into the Superannuation Industry (Supervision) Act 1993 (Cth) (SIS Act), which will be used to require trustees to offer comprehensive income products for retirement (CIPRs). As part of these measures, providers of retirement income products will be required to disclose standardised information on retirement income products, to assist fund members in their decision making. Below is an overview of the key superannuation-related proposals.

Retirement income framework – superannuation fund trustees to offer CIPRs

With the aim of raising the standard of living for retirees, the Government 'is developing a retirement income framework to increase flexibility and choice for retirees and help boost living standards'.¹ Central to this framework are amendments to the SIS Act, which will introduce a new 'retirement covenant', requiring trustees of superannuation funds to formulate a 'retirement income strategy' for fund members. Trustees are currently subject to a raft of SIS covenants, including to formulate, review regularly, and give effect to investment and insurance strategies. However, notwithstanding the sole purpose test and the best interests covenants, trustees have 'no obligations … to consider the retirement income needs of their members'.² The introduction of the new 'retirement covenant' is intended to address this apparent deficiency, and we understand that it is intended to require trustees to offer Comprehensive Income Products for Retirement (CIPRs), although it is not clear that a retirement covenant would do this. We have previously commented on Treasury's CIPR Framework. CIPRs are essentially products designed to provide individuals with income for life, regardless of how long they live.

The Government also proposes to amend the Corporations Act 2001 (Cth) to require providers of retirement income products 'to report simplified, standardised metrics in product disclosure to assist customer decision making' .³

The Government's 'Retirement Income Framework' will also bring changes to the pension means test rules, which will be amended 'to encourage the development and take-up of lifetime retirement income products' by retirees.⁴ The new rules will come into effect from 1 July 2019, although 'grandfathering' will be available for pooled lifetime income streams bought before this date. While it won't be compulsory for retirees to purchase a CIPR, by increasing demand for CIPRs, the new rules aim to encourage the superannuation industry 'to develop innovative products that can help retirees manage the risk of outliving their income.' ⁵

A Government position paper on CIPRs is expected to be released for public consultation shortly, and will provide further guidance on the Government's proposed approach to the new retirement covenant. Government will also consult on the disclosure-related amendments.⁶

'Protecting Your Super Package'

Fee protections – passive fees and exit fees

The Minister for Revenue and Financial Services, the Honourable Kelly O'Dwyer MP, has indicated that '[i]n 2015–16 there were around 9.5 million super accounts with balances of less than $6,000.'⁷ The Government is seeking to protect small super balances through the introduction of a 3 per cent annual cap on 'passive fees' (ie administration and investment fees), which will apply to superannuation accounts with account balances under $6000 from 1 July 2019. In addition, exit fees will be banned on all superannuation accounts, which the Government views as a 'barrier to consolidating … accounts'.⁸

ATO consolidation of small and inactive super accounts

As part of the Government's 'Protecting Your Super Package' initiative, superannuation funds will be required to transfer all inactive superannuation accounts with balances of less than $6000 to the ATO, with the aim of protecting small and inactive balances and 'proactively reuniting' them with a member's active super account.⁹ According to Ms O'Dwyer:

This new system is expected to send $6 billion of superannuation back to 3 million members' active superannuation accounts in 2019–20.¹⁰

Changes to superannuation insurance arrangements

With the aim of protecting the retirement savings of young Australians and those with low or inactive accounts (including those with multiple small account balances), the Government also proposes to amend the 'MySuper' insurance arrangements, which currently require members to 'opt out' of default insurance cover. According to Ms O'Dwyer:

Based on the most recent data, around 5 million individuals will have the opportunity to save an estimated $3 billion in insurance premiums by choosing to opt-in to this cover, rather than paying for it by default.¹¹

This change will enable the following types of members to 'opt-in' to a tailored insurance framework. Those:

• with low balances, under $6000;
• aged 25 years and younger; or
• with inactive accounts that have not received a contribution in 13 months.

The changes are expected to take effect from 1 July 2019, with affected members having 14 months to decide whether to opt-in to their existing cover.¹²

Improving integrity of personal contributions deductions

The Government intends to allocate $3.1 million in funding to the ATO, to introduce a new compliance model to regulate personal super contributions more effectively from 1 July 2018. At present, some individuals make before-tax contributions by claiming a tax deduction for after-tax contributions. The Government has detected that some individuals have been claiming the deductions without submitting to their super funds the required 'notice of intent' (NOI) to deduct. The ATO will be asked to develop a new compliance model for NOIs, which will include changes to income tax returns. This proposal is projected to collect revenue of $430 million, by ensuring deductible contributions are appropriately taxed by superannuation funds.¹³

Super guarantee opt-out for high-income earners

High-income earners with income exceeding $263,157 and multiple employers will be allowed to nominate that their wages from particular employers are not subject to the Superannuation Guarantee (SG) from 1 July 2018. This measure is intended to prevent what are now unavoidable breaches of the annual concessional contributions cap of $25,000 resulting from multiple compulsory SG contributions. High-income earners who benefit from this measure may be able to negotiate additional income taxed at a marginal rate, rather than SG contributions.¹⁴

Superannuation work test exemption for recent retirees

A limited exemption from the work test will be introduced for voluntary super contributions for people aged 65–74 with superannuation balances below $300,000 in the first year that they do not meet the work test requirements. This is intended to give recent retirees additional flexibility to get their financial affairs in order while in transition to retirement.¹⁵ More information and an example can be found in Budget Fact Sheet 3.2

Financial institutions supervisory levies to be increased

In accordance with the Australian Government Cost Recovery Guidelines, the Government intends to increase the Financial Institutions Supervision Levies from 1 July 2018, a measure that is expected to result in $31.9 million in extra revenue over a four-year period. This additional funding will fully recover the cost of superannuation activities undertaken by the ATO.¹⁶