Imminent regulatory changes are top of mind for advisers looking for strategies to help clients make the most of their retirement savings and ease cost of living pressures. This article discusses the most common technical and regulatory topics that advisers have been asking BT’s technical team during the July-September 2022 quarter:
- The Commonwealth Seniors Health Card
- Downsizer contributions into super
- The Home Equity Access Scheme
- Increase to the transfer balance cap, and
- Work test requirements.
1. Income thresholds for Seniors Health Card increase by more than 50%
For the first time in over 20 years, the income thresholds for the Commonwealth Seniors Health Card will be raised (outside of indexation), pending legislation which is currently in Parliament.
If passed, the income thresholds for singles will increase to $90,000 from the current $61,284; for couples, the increase is $144,000, from $98,054 currently.
Becoming eligible for the Commonwealth Seniors Health Card gives individuals access to valuable concessions, such as cheaper medicine under the Pharmaceutical Benefits Scheme. Visits to the doctors can potentially be bulk-billed and people can receive a refund of medical costs when they reach the Medicare safety net. Additionally, card holders may also receive economic support payments which were worth $1,000 across 2020 and 2021.
Around 44,000 more Australians are expected to qualify for the Seniors Health Card, if the bill passes.
Unfortunately, the Bill was not passed during the recently concluded sittings. The commencement date for these changes has been adjusted from 20 September 2022, with the changes to apply for applications made at least seven days after the Bill receives Royal Assent. With parliament not due to resume until the Budget sittings at the end of October, the increased threshold won’t have application until at least November 2022.
2. Downsizers
More Australians are expected to be able to make a downsizer contribution into super – up to $300,000 per person of $600,000 for a couple – with the eligibility age expected to reduce to 55 years, from the current 60 years, in coming months.
Advisers with clients who are about to turn 55 years of age, and are planning to sell their home, may wish to consider the timing of the legislation. Again, this amending legislation is currently in Parliament and with a commencement date of the beginning of the first quarter after Royal Assent, the earliest commencement date will now 1 January 2023.
To be able to contribute proceeds from a property sale into their super, amongst other requirements, clients need to have owned their home for 10 years or more. A downsizer contribution doesn’t count towards any other contribution caps and can still be made even if a person has total super savings greater than $1.7 million.
Downsizer example: sale of home
Roger is 61 years old and married to Mandy who is 55 years old. They live in their home purchased over 15 years ago.
They are looking to sell their home to downsize to a more manageable sized property near their children and grandchildren.
Should they sell their home for $1 million under current rules, only Roger would be eligible to contribute up to $300,000 to super as a downsizer contribution, within 90 days of receipt of the proceeds.
Under the new rules both Roger and Mandy could contribute up to $300,000 to super each as downsizer contributions.
Importantly, both Roger and Mandy would be eligible to contribute even where their home was owned in only one of their names. Additionally, three is no requirement to purchase a new home and the amount contributed can be from the sale proceeds or other savings they may have.
3. Home Equity Access Scheme
Considerably more senior Australians are participating in the Home Equity Access Scheme (HEAS), and take-up is expected to increase due to recent changes which have made the scheme more flexible.
The HEAS allows Australians who are of age pension age, to enhance their income in retirement by accessing the equity in a property they own. Prior to 1 July, an eligible person could only receive their loan amount as a fortnightly payment. Similar to what is generally available from a commercial reverse mortgage, lump sum advance payments are now also an option under the scheme. Any lump sum is capped at 50% of the participant’s maximum pension rate.
Alternatively, a scheme participant may choose to take a partial lump sum amount and then the remainder as a fortnightly payment.
While the HEAS may suit some senior Australians, there are many considerations that should be weighed up. Using an existing property as security for a HEAS loan has the potential to impact on estate planning, so some Australians who are eligible may be hesitant about taking part in the scheme.
HEAS example: pension and lump sum
Margaret is aged 70 and a single homeowner receiving the full age pension. She could choose to apply for the HEAS using her home as security for the loan.
Under the HEAS, Margaret could receive 50% of the maximum pension rate as a lump sum advance or as a fortnightly payment. She could also choose any combination of these two options providing the total amount she draws does not exceed 50% of the maximum pension rate.
If Margaret was a part-age pensioner, she could receive up to 50% of the maximum pension as a lump sum and top-up her fortnightly age pension with an additional amount, so long as these two amounts, plus her rate of part-age pension does not exceed 150% of the maximum pension rate.
4. Inflation set to increase transfer balance cap to $1.8 million
Based on the current trajectory of the Consumer Price Index, the general transfer balance cap is expected to increase to $1.8 million from 1 July 2023, unless legislative changes are introduced.
The transfer balance cap limits the amount of superannuation that can be transferred to tax-free retirement income streams, with the general cap currently $1.7 million.
High net worth individuals who aren’t in a hurry to start a pension may want to hold off until 1 July next year; although it’s worth noting that, with Australia’s inflation reaching its highest level in over 20 years, there is a possibility that the Federal Government could make changes to indexation of certain thresholds such as the transfer balance cap.
5. Work test requirements
The application of the work test rules is consistently one of the most popular technical topics among advisers.
Individuals aged between 67 and 74 who have recently retired may still be eligible to make personal deductible contributions to super, if they meet certain eligibility criteria around their previous year of work and their total super balance.
Generally, to claim a deduction for a personal contribution, if a super fund member is between the ages of 67 and 74 they ‘must have been gainfully employed for at least 40 hours in any period of 30 consecutive days during the financial year in which the contribution was made.’ [Income Tax Assessment Act 1997 – SECT 290.165 (1A) (a)]
An exemption to the work test applies only if the person meets another set of criteria. People who have not been gainfully employed during the financial year can still make a personal deductible contribution if: they met the work test in the financial year immediately prior to the year of the contribution; and they have a total super balance of less than $300,000 at the end of the previous financial year; and they had not previously used the work test exemption in a previous financial year to make a contribution to any regulated super fund.
The work test exemption provides an opportunity for recent retirees to potentially make personal deductible contributions to super at a time when such contributions were previously off the table, as illustrated in the example below.
Work test example: sale of an asset
Joanne is 70 years old, retired, and has recently sold an investment property in the 2022-23 financial year, resulting in a taxable capital gain of $250,000. Joanne had $290,000 in super on 30 June 2022.
Joanne was previously a self-employed freelance writer and has had sporadic work patterns over the last 5 years. She did not work more than seven to eight hours a week (i.e. did not meet the work test) between the 2017-18, to the 2020-21 financial years, however as a result of a full-time contract during August 2021, she did meet the work test within the 2021-22 financial year.
Whilst Joanne is eligible to make a bring-forward contribution in the 2022-23 financial to contribute up to $330,000 as a non-concessional contribution to super, she may consider using her carry forward concessional cap space, and then claim a tax deduction for this contribution to reduce her taxable income due to the capital gain from the sale of her investment property.
While Joanne did not meet the work test for several years, this doesn’t preclude her from meeting the requirements for the work test exemption. She firstly met the work test in the financial year immediately prior to the year of contribution, and secondly, she has not used the work test exemption previously (noting it wasn’t available to use prior to 1 July 2019).
Tim Howard is a member of BT’s technical team who field over 2,000 queries from advisers every quarter regarding superannuation, tax and social security.
This information was prepared by BT, a part of Westpac Banking Corporation ABN 33 007 457 141 AFSL and Australian Credit Licence 233714 (Westpac) and is current as at 5 October 2022. The information provided is general information only and it does not constitute any recommendation or advice. It is intended to provide an overview or summary and should not be considered a comprehensive statement on any matter or relied upon as such. Any recommendation or opinion provided does not take into account your personal objectives, financial situation or needs, and you should consider its appropriateness having regard to these factors. Any taxation position described is a general statement and should only be used as a guide. It does not constitute tax advice and is based on current tax laws and our interpretation.