Well, as promised there are some pretty significant changes to government revenue and spending within Joe Hockey’s first budget as Treasurer. Apparently he was pretty excited about it as he was caught dancing to the song “This would be the best day of my life” just prior to the budget being announced. Anyway, here is a brief outline as to what some of the proposed changes are and how you could potentially take advantage of some of them.
Temporary Budget Repair Levy
A levy of 2% will apply to anyone who has taxable income above $180,000. For example, if you earned $200,000, then on the extra $20,000 you will pay an additional 2% tax or $400.
Comment: Importantly, as this is taxable income, strategies can be employed to reduce the level of taxable income that you have. ie. Deductible Super contributions, interest on investment loans etc.
Option to withdraw excess non-concessional (after tax) contributions from Superannuation.
Currently, if you make a contribution to super that exceeds the non-concessional contribution limit (currently $450,000 this year if you borrow from the following two years), then you would have paid tax of 46.5% on the amount you go above that limit. Ie. If you mistakenly put in $540,000 (the limit next financial year) this year, then on the additional $90,000 that you have put in you would pay tax of $41,850.
The government has recognised the failings in the above system and has decided to allow people to withdraw the excess contributions above these limits (in the case above – $90,000) without incurring the excess tax. A good outcome when you consider that most of the contributions above the amounts have been made by honest mistakes – expensive mistakes.
Age Pension Age to increase to 70 by 2035
This will have impact sooner than what is being portrayed in the media as per below
Date of Birth
Qualifying Age At
1 July 1952 to 31 December 1953
1 July 2017
1 January 1954 to 30 June 1955
1 July 2019
1 July 1955 to 31 December 1956
1 July 2021
From 1 January 1957
1 July 2023
1 July 1958 to 31 December 1959
1 July 2025
1 January 1960 to 30 June 1961
1 July 2027
1 July 1961 to 31 December 1962
1 July 2029
1 January 1963 to 30 June 1964
1 July 2031
1 July 1964 to 31 December 1965
1 July 2033
1 January 1966 onwards
1 July 2035
Comment: The Age Pension eligibility age was always increasing to 67 as per the above, the government has simply extended it.
Whilst the policy intention is to encourage people to continue working until age 70, the reality is many people will be unable to continue working. Effectively meaning that they will have to fund the gap between when you retire and when you are eligible for the age pension.
Our analysis shows that to fully fund this gap a single person will require an additional $96,432 in superannuation, whilst a couple will require an additional $145,378 to fund the five year gap.
Changes to the Commonwealth Seniors Health Card
The Commonwealth Seniors Health Card allows self-funded retirees to gain access to medicines listed on the PBS at a concessional rates. Currently to be eligible you must have an adjusted taxable income of $50,000 (singles) or $80,000 (couples, combined).
The changes mean the following:
Annual Indexation of the income thresholds to CPI
Account Based Pensions from Super funds that are subject to deeming (see below) will be included in the income test from 1 January 2015.
Comment: Under the proposed change, assuming no other income a new applicant will not qualify for a Seniors Health Card if their Account Based Pension exceeds $1,448,543 (singles) or $2,318,886 (couple, combined).
Worse still, the proposed change effectively locks people into their existing Account Based Pension provider as any change after 1st of January 2015 will see the new Account Based Pension deemed for the Seniors Health Care Card as well as the income test. As such, you need to review if the product you are currently in is the right one between now and the end of this calender year. Please see section below for the impact this change has on Age Pensions.
Resetting the Asset Test deeming rate thresholds and Deeming Account Based Pensions under the income test from 1 January 2015.
As per our media release sent earlier this week, this change will have a dramatic impact on clients.
Currently, the deeming thresholds are $46,600 for singles, $77,400 for pensioner couples. From 20 September 2017, the deeming thresholds for means tested payments will be reset to $30,000 for singles and $50,000 for couples (for both pensioners and those receiving allowances).
Put simply, in the past using Account Based pensions allowed you to significantly reduce the amount of income that was assessed from your pension for the Centrelink Income Test. For example, if you had $250,000 and was receiving the minimum pension from your Account Based Pension ($12,500), none of the income received would be included as part of the income test. However, from 1 July 2015, single pensioners would be assessed as earning $8,284 per annum from the account based pension, resulting in a reduction in Age Pension income of $2,113 per annum or approximately $80 per fortnight.
Freezing indexation of Income and Assets test Thresholds for 3 years.
The income test cut-off limit is currently at $1,841.60 per fortnight for Single people and $2,817.20 per fortnight for couples. Meanwhile the asset test cut-off limits are $758,750 for single people and $1,126,500 for couples. These limits will stay where there are for the next 3 years, whereas in the past they have been indexed with AWOTE.?
From 1 July 2017, Government Pension payments will be indexed with CPI.
Currently, Pension payments are indexed using Male Total Average Weekly earnings (usually increased each year by around 5%), from 1 July 2017, this will change and they will simply increase in line with CPI.
Superannuation Guarantee rate to increase to 9.5% from 1 July 2014
As the government is not so keen to fund our retirements through the age pension system, they would rather we did it ourselves. As such, they are still looking to increase the SG rate employers pay to their employees super to 9.5% next financial year. Although there has been some change to the rate of increase, by 2022/23 employers will be required to pay 12% of Salary into Superannuation.
Reduction in the Company Tax Rate
The company tax rate will be reduced by 1.5% to 28.5% from 1 July 2015 for companies that earn less than $5,000,000 in taxable income.
Comment : This may have an impact on Franking credits as those companies (think of large listed companies like CBA) that earn more than $5,000,000 in profit will pay 28.5% tax, however, there is a levy being applied to these companies of an additional 1.5% which will fund the Paid Parental Leave Scheme bringing the total back up to 30%. If the levy is not included (and it is not clear yet whether it will be), shareholders may receive the same level of dividends but less franking credits (assuming the levy is not franked) leaving them worse off.
Increase in Medicare Levy from 1 July 2014.
Currently the Medicare levy is 1.5%, however from 1 July 2014, this is going to increase to 2.0% to provide funding for Disability Care Australia. Please see the table below which outlines tax rates from 1 July 2014 financial year.
0 – 18,200
18,201 – 37,000
37,001 – 80,000
80,001 – 180,000
For example, if you earn $180,000 for the year, then any monies you earn above $180,000 will mean you are taxed at 47% in income tax, plus 2% in medicare – totalling 49%.
Paid Parental Leave to commence
From 1 July 2015, the government will proceed with the paid parental leave scheme whereby Mothers will receive up to 26 weeks of salary up to a cap of $100,000 (or $50,000) over 6 months. This is to be funded by a 1.5% levy on company’s earnings taxable income over $5,000,000.
Comment: Not only do you get a bundle of joy, you also now get a bundle of cash! A pretty nice baby bonus!
Changes to Higher Education Loan Programme and University Funding
From 1 July 2016, you now have to start paying back your HELP debt when you earn more than $50,638. Meanwhile, the annual indexation method applied to HELP will be changed from CPI to a rate equivalent to the 10 year Government Bond yield (currently 3.84%)
Universities will have complete freedom to set their own fees from 2016 onwards. The expectation is that fees from more prestigious universities will rise, whilst the fees in some less popular courses will fall. This is in line with the Coalition Governments philosophical thinking around less government interference the better.
Comment: This sounds to us like it is getting closer to the American College system. Importantly, when planning for education costs, we may now need to plan for a significant outlay in tertiary education spending for our children.
Cessation of the First Home Savers Account
Given the lack of take-up of these accounts the government has decided that the system is not really working and as such the Co-Contribution will cease as at 1 July 2014 and the tax concessions will cease as at 1 July 2015.
From 1 July 2015, existing account holders will be able to withdraw their account balances without restriction.
New subsidy for employers hiring Australians 50 years and over
The Government will introduce a new wage subsidy, to encourage businesses to employ Australians who are aged 50 and over and have been on income support for at least six months. Employers may receive up to $10,000 over 24 months in Government Assistance.
There have also been some significant changes to the Family Tax Benefit Part A and B and some other government payments, if you require further information on these please let us know. However, overall the intention of the budget is clear. The Coalition government wants us to “stand on our own two feet” especially when it comes to retirement income support.
If you have any questions about our budget summary please get in contact with us to chat through how this affects you personally you can either call Cameron or Paul on 03 9380 8844.