By Luke Hooper, Special Counsel
Released on 3 May 2016, the Budget contains some interesting announcements affecting the financial services industry.
The Australian managed funds industry has been given an international push with the announcement of Collective Investment Vehicle initiatives and support for the Asia Region Funds Passport.
The Government has given the National Innovation and Science Agenda a further nudge and has announced a “regulatory sandbox” for FinTechs and expansions to venture capital tax incentives and arrangement.
The Budget also introduces some of the most significant changes to superannuation since the introduction of Simpler Super by capping lifetime non-concessional contributions and introducing a pension account cap.
Please find below, short summaries of the announcements which we think may interest financial services providers.
Collective Investment Vehicles
- A new tax and regulatory framework is proposed for 2 types of Collective Investment Vehicles (CIVs) which are commonly used overseas: a corporate CIV (from 1 July 2017); and a limited partnership CIV (from 1 July 2018). This aims to maximise the effectiveness of fund managers offering investment products overseas.
Support for the Asia Region Funds Passport
- The Government will provide funding to ASIC over 4 years to implement a regulatory framework for the Asia Region Funds Passport.
- The Budget stated that ASIC will also release a consultation paper in the coming weeks on a “regulatory sandbox” exemption which will allow FinTech start-ups to test their product and systems in a controlled environment. This may ease some of the licensing costs incurred which can eat up seed capital before a start-up determines whether an idea has prospects of success.
Expanding venture capital limited partnership arrangements
- The fund size for Early-stage Venture Capital Limited Partnerships (ESVCLPs) will increase from $100 million to $200 million (which will apply to new and existing partnerships).
- Venture capital tax concessions will be confirmed to apply to FinTech, banking and insurance.
- The requirements for “very small entities” to provide an auditors’ statement of assets will be relaxed.
- A transitional arrangement will be added which allows conditionally registered funds that become unconditionally registered after 7 December 2015 to access the tax offset if criteria are met.
Tax incentives for early-stage investors
- The holding period for investors to access the 10-year capital gains tax exemption will be reduced from 3 years to 12 months.
- The definition of eligible start-ups will be amended to include a time limit on incorporation and criteria for determining an “innovative company”.
- Investors and innovators will be prohibited from being affiliates to access tax incentives.
- Investment for non-sophisticated investors will be limited to $50,000 or less per income year to receive a tax offset.
Increased funding for enforcement and surveillance
- ASIC and Treasury will receive increased funding to combat misconduct and support increased surveillance and enforcement: $121.3 million over 4 years to ASIC; and $5.9 million over 3 years to Treasury.
- The Government will be reviewing external dispute resolution schemes with the aim of better integrating these schemes to improve the handling of consumer complaints.
- The Superannuation Complaints Tribunal will be given $5.2 million to improve processes and reduce the backlog of complaints lodged. The cost of this measure will be offset by an increase in the Financial Institutions Supervisory Levies collected by the Australian Prudential Regulation Authority.
Superannuation contributions changes
- Applicable from 1 January 2017:
- Individuals with a superannuation balance less than $500,000 will be able to make additional concessional contributions, by carrying over any previously unused cap amounts on a rolling basis for a period of five consecutive years.
- The work test that applies to individuals aged 65 to 74 which must be met to receive spouse contributions will be removed.
- Increasing access to the low income spouse superannuation tax offset by raising the income threshold for the low income spouse to $37,000 from $10,800.
- As of 3 May 2016, a $500,000 lifetime non-concessional contributions cap, taking into account all non-concessional contributions made on or after 1 July 2007 will take effect. The lifetime non-concessional cap will replace the existing concessional contributions caps. After-tax contributions made into defined benefit accounts and constitutionally protected funds will be included in an individual’s lifetime non-concessional cap. If a member of a defined benefit fund exceeds their lifetime cap, ongoing contributions to the defined benefit account can continue but the member will be required to remove, on an annual basis, an equivalent amount (including proxy earnings) from any accumulation account they hold.
Taxation of Superannuation
- A $1.6 million transfer balance cap will be introduced on the total amount of accumulated superannuation an individual can transfer into the retirement phase. Subsequent earnings on these balances will not be restricted. Members already in the retirement phase with balances above $1.6 million will be required to reduce their retirement balance to $1.6 million by 1 July 2017. Excess balances for these members may be converted to superannuation accumulation phase accounts. A tax on amounts that are transferred in excess of the $1.6 million cap (including earnings on these excess transferred amounts) will be applied, similar to the tax treatment that applies to excess non-concessional contributions.
- Commensurate treatment (as for above) for members of defined benefit schemes will be achieved through changes to the tax arrangements for pension amounts over $100,000 from 1 July 2017.
- From 1 July 2017, the Government will introduce a Low Income Superannuation Tax Offset (LISTO) to reduce tax on superannuation contributions for low income earners (those with an adjusted taxable income of up to $37,000). The LISTO will provide a non-refundable tax offset to superannuation funds, based on the tax paid on concessional contributions made on behalf of low income earners, up to a cap of $500.
- From 1 July 2017, all individuals up to age 75, and regardless of their employment circumstances (for example, the partially self-employed), can claim an income tax deduction for personal superannuation contributions.
- From 1 July 2017, the Government will:
- lower the Division 293 threshold (the point at which high income earners pay 30% contributions tax) from $300,000 to $250,000; and
- reduce the annual cap on concessional superannuation contributions to $25,000 (currently $30,000 under age 50 or $35,000 for ages 50 and over).
- The lower Division 293 income threshold will also apply to members of defined benefit schemes and constitutionally protected funds currently covered by the tax.
Removal of transition to retirement (TTR) tax exemption
- Tax exemption on earnings of assets in TTR income streams will be removed from 1 July 2017 (meaning that these assets will be taxed at 15%, instead of the current 0%). The Government will also remove the rule that allows individuals to treat certain superannuation income stream payments as lump sums for tax purposes.
Enhancing choice in retirement income products
- From 1 July 2017, the Government will extend the tax exemption on earnings in the retirement phase to products such as deferred lifetime annuities and group self-annuitisation products. This will allow providers to offer a wider range of retirement income products which will provide more flexibility and choice for retirees, and help them to better manage consumption and risk in retirement, particularly longevity risk.
Removal of anti-detriment provision for death benefits from superannuation
- From 1 July 2017, the Government will remove the anti-detriment provision. Currently, this provision is inconsistently applied by superannuation funds.
Offering Choice in Public Sector Superannuation Accumulation Plan
- The Government will extend Public Sector Superannuation Accumulation Plan membership eligibility to allow Public Sector Superannuation Accumulation Plan members to choose to remain contributory members when they move to non-Commonwealth employment.
Financial Assistance to the New South Wales (NSW) Government for NSW Police
- A funding arrangement will be implemented to equally share the costs of reimbursing NSW police officers who incur an additional tax liability from making voluntary superannuation contributions that exceed the concessional contributions cap due to the impact of death and disability insurance premiums in respect of these persons.