2021 Federal Budget overview: Super, tax and aged care announcements

The work test applies if you wish to make contributions into your super account when you’re aged 67 to 74, and dictates that you need to be working at least 40 hours in a period of 30 consecutive days during the financial year in which you wish to make super contributions.

The government is repealing this work test, building on the changes made in the 2019 Federal Budget when the eligible age increased from 65 to 67, which applied from 1 July 2020.

The work test will be removed from 1 July 2022 (pending legislation).

Removing the work test will allow individuals aged 67 to 74 years (inclusive) to make or receive non-concessional or salary sacrifice superannuation contributions without meeting the work test, subject to existing contribution caps. These individuals will also be able to access the non-concessional bring-forward arrangement, subject to meeting the relevant eligibility criteria.

The government argues that since compulsory superannuation was only introduced in 1992 and only rose to 9% from 2002, this meant most retirees weren’t able to build up super savings through their whole working lives, and many retirees instead accumulated savings outside of superannuation. Removing the work test will enable them to contribute more to their super.

The annual concessional and non-concessional caps will continue to apply, as will the existing transfer balance cap on lifetime superannuation contributions ($1.7 million from 1 July 2021).

First Home Super Saver Scheme – Increasing the maximum releasable amount to $50,000

The First Home Super Saver (FHSS) Scheme allows super contributions to be released for a deposit on a first home.

The government will increase the maximum releasable amount of voluntary concessional and non-concessional contributions under the FHSS Scheme from $30,000 to $50,000.

The new $50,000 cap will apply from 1 July 2022 (pending legislation).

Voluntary contributions made from 1 July 2017 up to the existing limit of $15,000 per year will count towards the total amount able to be released.

The government will also make four technical changes to the scheme to improve its operation, particularly assisting those who make errors on their FHSSS release applications.

Downsizer super contributions – Reducing eligibility age from 65 to 60

Downsizer contributions allow people to make a one-off, post-tax contribution to their superannuation of up to $300,000 per person ($600,000 per couple) from the proceeds of selling their home, outside the usual non-concessional contribution caps.

The minimum age requirement will be reduced from 65 to 60.

The change in age eligibility will apply from 1 July 2022 (pending legislation).

Downsizer contributions give pre-retirees and retirees more flexibility to contribute to their superannuation, especially women and those with moderate balances. Around 55% of those who have used the downsizer contribution to date are women, and 73% have balances less than $500,000.

People with balances over the transfer balance cap (which is $1.7 million from 1 July 2021) are also able to make a downsizer contribution, however the downsizer amount will count towards that cap when savings are converted to the retirement phase.

Pension Loans Scheme enhancements – Lump sums access and guarantee against negative equity

The Pension Loans Scheme (PLS) is a voluntary, reverse mortgage type loan available to assist Australians of Age Pension age who wish to boost their retirement income by unlocking equity in their home. Through the PLS, retirees can receive a tax-free fortnightly income stream by taking out a loan of up to 150% of the maximum rate of Age Pension. An interest rate (currently 4.5%) is charged.

The Government announced enhancements to the scheme that will apply from 1 July 2022 (pending legislation).

Participants in the PLS will be able to access lump sum advances of up to a total value of 50% of the maximum annual rate of Age Pension. This can be on top of receiving a full Age Pension.

Those with a part-rate Age Pension will also be able to access a lump sum worth 50% of a full Age Pension. They will continue to be able to use the PLS to top-up their fortnightly pension through the PLS, such that their combined Age Pension plus PLS benefit (both lump sums and income stream) is up to 1.5 times a full-rate Age Pension payment.

Based on current Age Pension rates, a single person would be able to receive lump sum payments of up to $12,385 per year, while couples combined could receive up to $18,670.

A maximum of two advances totalling up to the cap amount are permitted in a year for those who do not want to take an advance in one instalment.

PLS and self-funded retirees

Under the existing PLS, self-funded retirees of Age Pension age who do not receive any Age Pension can get an income boost over a year worth 1.5 times a full-rate Age Pension payment. This represents around $37,155 per year for singles and around $56,011 per year for couples.

The increased flexibility from 1 July 2022 will allow a self-funded retiree to get a lump sum payment worth up to 50% 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.

This is on top of the other amounts they would receive under the PLS up to the maximum annual amount and means they will be able to bring forward one third of their maximum PLS payments if they choose to do so.

No Negative Equity Guarantee

A No Negative Equity Guarantee will mean that borrowers under the PLS, 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. This brings the PLS in line with private sector reverse mortgages.

Stronger outcomes for super consumers

The government will provide $11.2 million over four years from 2021-22 (and $3.1 million per year ongoing) to support stronger consumer outcomes for members of superannuation funds by providing:

• $9.6 million for APRA to supervise and enforce increased transparency and accountability measures as part of the government’s Your Future, Your Super reform
• $1.6 million to Super Consumers Australia to support stronger consumer outcomes on behalf of superannuation fund members.

The funding for this initiative will be partially met through an increase in levies on regulated financial institutions.

SMSFs – Amnesty on legacy retirement income products

A two-year amnesty will be introduced to enable holders of certain legacy retirement income products to convert to newer, more flexible products.

This will apply from 1 July 2022 (pending legislation).

Currently, individuals are locked into certain products that restrict access to capital and flexibility of drawdowns, preventing them from effectively using their retirement savings for health, aged care and other large expenses in retirement.

A two-year period will be provided for conversion of market-linked, life-expectancy and lifetime pension and annuity products. Importantly, it will not be compulsory for individuals to take part.

Retirees with these products will be able to completely exit these products by fully commuting the product and transferring the underlying capital, including any reserves, back into a superannuation fund account in the accumulation phase. From there they can decide to commence a new retirement product, take a lump sum benefit or retain the funds in that account.

Any commuted reserves will not be counted towards an individual’s concessional contribution cap and will not trigger excess contributions. Instead, they will be taxed as an assessable contribution of the fund (with a 15% tax rate), recognising the prior concessional tax treatment received when the reserve was accumulated and held to pay a pension.

The existing social security treatment that applies to the legacy product will not transition over for those who elect to take advantage of the conversion. Exiting a product will not cause re-assessment of the social security treatment of the product for the period before conversion.

Existing rules for income streams will continue to apply so that individuals starting a new retirement product will be limited by the transfer balance cap rules. The existing transfer balance cap valuation methods for the legacy product, including on commencement and commutation, continue to apply.

The government hopes this policy will improve simplicity for retirees, enabling them to purchase flexible and contemporary retirement products, promoting efficiency and reducing costs in the super system.

Which products are covered?

Market-linked, life-expectancy and lifetime products which were first commenced prior to 20 September 2007 from any provider, including self-managed superannuation funds (SMSFs).

Flexi-pension products offered by any provider, and lifetime products offered by a large APRA-regulated defined benefit schemes or public sector defined benefit schemes, will not be included.

The government has provided the following examples:

SMSFs – Relaxing residency requirements

The government will relax residency requirements for self-managed superannuation funds (SMSFs) and small APRA-regulated funds (SAFs) by extending the central control and management test safe harbour from two to five years for SMSFs, and removing the active member test for both fund types.

This will apply from 1 July 2022 (pending legislation).

This measure will allow SMSF and SAF members to continue to contribute to their superannuation fund while temporarily overseas, ensuring parity with members of large APRA-regulated funds. This will provide SMSF and SAF members the flexibility to keep and continue to contribute to their preferred fund while undertaking overseas work and education opportunities.

TAX ANNOUNCEMENTS

Income tax – Retaining the low and middle income tax offset for 2021-22

The government will retain the low and middle income tax offset (LMITO) for the 2021-22 income year, providing further targeted tax relief for low- and middle-income earners.

The LMITO provides a reduction in tax of up to $1,080.

• Taxpayers with a taxable income of $37,000 or less will benefit by up to $255 in reduced tax.
• Between taxable incomes of $37,000 and $48,000, the value of the offset increases at a rate of 7.5 cents per dollar to the maximum offset of $1,080.
• Taxpayers with taxable incomes between $48,000 and $90,000 are eligible for the maximum offset of $1,080.
• For taxable incomes of $90,000 to $126,000, the offset phases out at a rate of 3 cents per dollar.

Consistent with current arrangements, the LMITO will be received on assessment after individuals lodge their tax returns for the 2021-22 income year.

Income tax – Increasing the Medicare levy low-income thresholds

The government will increase the Medicare levy low-income thresholds for singles, families, and seniors and pensioners from 1 July 2020 to take account of recent movements in the CPI so that low-income taxpayers generally continue to be exempt from paying the Medicare levy.

• The threshold for singles will be increased from $22,801 to $23,226.
• The family threshold will be increased from $38,474 to $39,167.
• For single seniors and pensioners, the threshold will be increased from $36,056 to $36,705.
• The family threshold for seniors and pensioners will be increased from $50,191 to $51,094.
• For each dependent child or student, the family income thresholds increase by a further $3,597 instead of the previous amount of $3,533.

Modernising the individual tax residency rules

The government will replace the individual tax residency rules with a new, modernised framework. The primary test will be a simple ‘bright line’ test — a person who is physically present in Australia for 183 days or more in any income year will be an Australian tax resident. Individuals who do not meet the primary test will be subject to secondary tests that depend on a combination of physical presence and measurable, objective criteria.

Australia’s current tax residency rules are difficult to apply in practice, creating uncertainty and resulting in high compliance costs for individuals and their employers.

The new framework, based on recommendations made by the Board of Taxation in its 2019 report to Government Reforming individual tax residency rules — a model for modernisation, will be easier to understand and apply in practice, deliver greater certainty, and lower compliance costs for globally mobile individuals and their employers.

Taxation of Financial Arrangements — hedging and foreign exchange deregulation

The government will make technical amendments to the Taxation of Financial Arrangements legislation that will include facilitating access to hedging rules on a portfolio hedging basis. The amendments will also reduce compliance costs and correct unintended outcomes, so that taxpayers are not subject to unrealised taxation on foreign exchange gains and losses unless this is elected.

These changes will take effect for relevant transactions entered into on or after 1 July 2022.

AGED CARE ANNOUNCEMENTS

The government has pledged $17.7 billion over five years (from 1 July 2020) as part of their response to the recommendations of the Royal Commission into Aged Care Quality and Safety.

This comprises:

$7.5 billion for home care

• $6.5 billion over four years to release 80,000 additional home care packages over two years from 2021-22. This will bring the total number of home care packages to 275,598 by June 2023
• $798 million to provide greater access to respite care services and payments to support carers
• $272 million over four years to support senior Australians to access information about aged care, navigate the aged care system and connect to services through the introduction of dedicated face-to-face services
• $28.5 million in 2021-22 to ensure the continued operation of My Aged Care
• $18.4 million over four years from 2021-22 to enhance the oversight and transparency of the delivery of home care packages
• $10.8 million in 2021-22 to design and plan a new home care program to better meet the needs of senior Australians.

$8.7 billion for residential aged care

• $3.9 billion over four years from 2021-22 to increase the amount of front line care (care minutes) delivered to 240,000 aged care residents and 67,000 who access respite services, by 1 October 2023. This will be mandated at 200 minutes per day, including 40 minutes with a registered nurse
• $3.2 billion to support aged care providers to deliver better care and services through a new Government-funded Basic Daily Fee supplement of $10 per resident per day, while continuing the 30% increase in the homelessness and viability supplements
• $365 million to improve access to primary care and other health services in residential aged care, and additional investment in digital and face-to-face assistance to make it easier to navigate the aged care system
• $301 million, primarily for the Aged Care Quality and Safety Commission to safeguard the quality, safety and integrity of aged care services and address failures in care and to extend support to manage and prevent outbreaks of COVID-19
• $279 million over three years from 2020-21 to further support residential aged care providers through the continuation of temporary financial supports and the Viability Fund
• $200 million to introduce a new star rating system to provide senior Australians, their families and carers with information to make comparisons on quality and safety performance of aged care providers
• $189 million over four years from 2020-21 to implement the new funding model, the Australian National Aged Care Classification (AN-ACC)
• $117 million to support structural reforms, including discontinuation of the current bed licence and the Aged Care Approvals Round process from 1 July 2024, and implementation of a new Refundable Accommodation Deposit (RAD) Support Loan Program. This funding also includes strengthened financial reporting requirements for residential aged care providers
• $74 million for the Dementia Behaviour Management Advisory Service and the Severe Behaviour Response Teams to strengthen the regulation of chemical and physical restraints, and to further reduce reliance on these restraints.
• $49 million for the current independent hospital pricing authority to help ensure that aged care funding is directly related to the cost of care.

$698 million for governance and regional access

• $630 million to improve access to quality aged care services for consumers in regional, rural and remote areas including those with Indigenous backgrounds and special needs groups
• $26 million over four years to develop a new aged care Act to replace both the Aged Care Act 1997 and the Aged Care Quality and Safety Commission Act 2018
• $21 million over four years from 1 July 2021 to establish the National Aged Care Advisory Council to provide advice to government on the aged care sector including implementation of the aged care reforms and a Council of Elders to provide advice to government on quality and safety in the aged care sector
• $13 million in 2021-22 to establish regional offices as a first phase of a nationwide rollout to improve advice to government on issues impacting the delivery of aged care in regional and rural areas
• $6.8 million over three years from 2021-22 for information and engagement with the aged care sector, aged care users and their families about aged care reforms.

$652 million for increasing the aged care workforce

• $216 million over three years from 2021-22 to grow and upskill the workforce and enhance nurse leadership and clinical skills through additional nursing scholarships and places in the Aged Care Transition to Practice Program, to provide more dementia and palliative care training for aged care workers, to recruit aged care workers in regional, rural and remote areas and to provide eligible registered nurses with additional financial support
• $228 million to support the establishment of a single aged care assessment workforce for residential care from October 2022, and for home care from July 2023
• $105 million to introduce nationally consistent worker screening, register and code-of-conduct for all care sector workers including aged care workers
• $91 million over two years from 2021-22 to support the training of 13,000 new home care workers
• $9.8 million over two years from 2021-22 to extend the Care and Support Workforce national campaign.