Federal Budget - What's in it for you?
by Darren Reiger, Para-Planner
There weren’t too many surprises in this year’s Federal Budget as the Treasurer Wayne Swan delivered what he describes as a ‘no frills responsible’ budget. Another term for the budget could very well be titled ‘let’s play it safe so as not to upset the everyday punters before an election’!
However, on closer inspection, the budget has delivered a few unexpected blows, including a permanent reduction in the Governments superannuation co-contribution scheme. While the Government’s take up of the Henry Review’s recommendation to increase tax on the mining industry produced most of the discussion prior to the budget (ironically coinciding with the release of Russell Crowe’s latest cinematic extravaganza “Robin Hood - the taker from the rich and giver to the poor”), Mr Swan delivered a budget short on major changes.
For the financial services industry, there were a number of announcements affecting the majority of Australians and, in particular, the area of superannuation.
The following provides a very brief summary of the major changes that will affect you, as our client, going forward in the new financial year.
Government superannuation Co-contributions
Currently the Government pays to your superannuation a matching rate of 100% up to a maximum of $1,000 for low income earners who make personal non-concessional contributions. This matching rate was to be gradually increased over the next four financial years to an eventual rate of 150%. This rate will now be permanently capped at 100%. This is not great news for lower to medium income earners as they will also see the indexation of income thresholds used to determine eligibility for the co-contribution be frozen for the next two financial years.
Increasing the Superannuation Guarantee Charge (SGC) Rate
The SGC rate will be increased gradually from its current rate of 9% to 12% by small annual increments commencing 1 July 2013 up to 1 July 2019. This is a welcome boost to most retirement savings nest eggs as more and more people are becoming aware they require larger lump sums in retirement to fund their cost of living needs. It will, however, raise an interesting question regarding how salary packages are impacted over the coming years as employers may adjust the level of your take home pay to incorporate the impact of higher SGC payments.
Increasing the SGC age limit
Whilst only affecting a small number of people, the SGC age limit will be raised from 70 to 75 commencing 1 July 2013. This will now simplify contribution rules as the limit now matches the age limit for voluntary and self employed contributions.
Super contributions tax rebate for low income earners
The Government will make an extra contribution of up to 15% of the concessional contributions made by low income earners from 1 July 2012, subject to a maximum of $500, to offset contributions tax. This may encourage some people on a low income to salary sacrifice more to superannuation to take advantage of the maximum limit. Self employed people could also take advantage if their adjusted taxable income is below the qualifying income limit.
Concessional contributions cap increased
The concessional contributions cap for people aged 50 and over was to reduce from $50,000 to $25,000 from 1 July 2012. However this cap has now been retained at $50,000 (indexed) permanently for those people who have total superannuation balances of under $500,000. As employer contributions are included in the concessional contributions cap, this retention at the higher rate will now allow people who are employing salary sacrifice and transition to retirement strategies to continue to contribute more to superannuation. Keep in mind the Government will consult with the superannuation industry on the operation of the $500,000 balance threshold.
50% discount for interest income
From 1 July 2011, individuals will be entitled to a 50% tax discount on up to $1,000 of interest earned and will be available for interest income earned directly as well as indirectly, such as via a trust or managed investment scheme. The tax concession will operate in similar fashion to the current Capital Gains Tax (CGT) discount which taxes only 50% of most capital gains made by individuals directly or via managed funds. The concession is designed to encourage savings and ‘level the playing field’ for lower income and older investors who hold their savings in bank accounts and similar investments which are fully taxed, rather than CGT assets which attract the CGT discount tax concession.
Increase in the medical expenses tax offset claim threshold
The threshold above which a taxpayer may claim the net medical expenses tax offset is to increase from $1,500 to $2,000 from 1 July 2010. This is a significant blow to tax payers who have substantial medical expenses throughout the year although it must be noted that the threshold has remained stagnant since 2002-03.
Increase in the Medicare levy low income thresholds
The Medicare levy low income thresholds will increase to $18,488 for individuals, $31,196 for families and $27,697 for single pensioners below Age Pension age effective 1 July 2009.
Standard tax deduction for work related expenses and tax accounting costs
The Government proposes to allow a standard deduction of $500 for work related expenses and the cost of managing tax affairs from 1 July 2012 increasing to $1,000 from 1 July 2013. This will be an appealing option for those who are employed on a salary with little to claim. However those with deductible expenses greater than the standard deductible amount will still be able to claim their higher expenses in the standard way.
Change in benchmark interest rate for capital protected borrowings
The Government has announced it will adjust the benchmark interest rate that applies to capital protected borrowings to the RBA indicator rate for standard variable loans plus 100 basis points. This will retrospectively apply to capital protected borrowings established from 13 May 2008. As at 14 May 2010 the benchmark rate stands at 8.15%.
While the aforementioned changes form the major issues relating to our clients, there are further issues arising from the Budget that your Financial Adviser will be happy to discuss with you in further detail.
For more information, or to arrange an appointment with a John Hopkins Financial Adviser, please contact our Client Liaison Officer on 1300 726 082 or click here.