THE GOOD, THE BAD AND EVERYTHING IN-BETWEEN
This Budget could be described as uneventful as it contained little in the way of sweeteners for middle-income earners, families and pensioners. Many of the key announcements were released pre-budget and confirmed by the Government in the budget papers. These include a number of changes to the superannuation system such as an increase in the concessional contributions cap for older Australians, changes to the excess contributions tax regime and 15% tax on certain earnings in the pension phase.
The Budget also contained some announcements that were unexpected including the phase out of the net medical expense, the removal of the baby-bonus, and a new housing help pilot scheme allowing pensioners to downsize the family home without affecting their pension.
Before any of these announcements can be implemented, they will require passage of legislation.
Implications for interest rates
While there is a fiscal tightening in the Budget, it is actually zero this year and doesn’t kick in until 2014-15 at 0.4% of GDP before rising to 0.7% of GDP in 2015-16. This makes it somewhat academic (as it may not even occur) given past experience and is unlikely to have any impact on the Reserve Bank of Australia’s (RBA) immediate thinking regarding interest rates.
Implications for Australian assets
It’s hard to see a major impact on Australian assets.
Cash and term deposits
We can’t see much impact here at all. The RBA is likely to cut rates further which is likely to put more downwards pressure on term deposit rates. Expect term deposit rates to fall below 4% in the months ahead.
The delay in a return to surplus is probably not enough to threaten Australia’s AAA sovereign rating and continuing low interest rates should ensure bond yields remain low. But the problem remains that with five-year bond yields at 2.8%, it’s hard to see great returns from Australian sovereign bonds over the next few years.
While increased spending on roads and rail may help construction and building material stocks, the impact is likely to be minimal. It’s hard to see much impact on the share market overall, where we see the broad trend remaining up thanks to reasonable valuations, easier monetary conditions and prospects for stronger profits.
Property prices are likely to continue gaining at a modest pace on the back of low interest rates and as domestic growth starts to pick up.
While the initial response to the Budget saw the A$ fall 0.5%, the announcements in the Budget alone are not radical enough to have much of an impact on the A$. In the very short term, the A$ was oversold after last week’s sharp fall. However, with the commodity price boom fading, the interest rate differential in favour of Australia falling and the A$ overvalued on a purchasing power parity basis, the trend in the A$ is now likely to be down.
Implications for those nearing retirement
Increasing the concessional cap for certain superannuation members
The current concessional contributions cap is $25,000 for individuals of all ages. If you contribute more than this cap, you may have to pay extra tax.
This cap is proposed to increase to $35,000 (unindexed) for those:
- Aged 60 and over from 1 July 2013, and
- Aged 50 and over from 1 July 2014.
Concessional contributions include employer contributions, salary sacrifice contributions and personal contributions where a tax deduction has been allowed.
If you are aged 59 or more on 30 June 2013 you can take advantage of the higher cap by making concessional contributions up to $35,000 during the 2013-14 financial year.
The higher concessional contribution cap will apply until the general concessional contribution cap reaches $35,000 due to indexation (expected to occur from 1 July 2018). That is, the higher cap will only be temporary.
The current $150,000 limit together with the additional 2 year bring forward rules for non-concessional contributions remain completely unchanged.
Fairer excess contributions tax system
Amounts contributed to a superannuation fund in excess of the concessional contributions cap are currently taxed at 46.5 per cent.
Excess concessional contributions made from 1 July 2013 will be taxed at your marginal tax rate (MTR), plus an interest charge to recognise that tax on excess contributions is collected at a later date than normal income tax. You will also be able to withdraw the excess contribution from your superannuation fund.
This measure will be much more flexible than under the current rules where refunds are limited to excess contributions of less than $10,000 and only on a once off basis.
Implications for those in retirement
Deeming of account-based pensions from 1 January 2015
Under the current Centrelink rules, account-based pensions are fully assessable under the assets test.
However, income received from account-based pensions is currently treated more favourably than income generated by other financial investments such as bank accounts, shares and managed funds under the income test. This is because income from an account-based pension attracts a non-assessable portion, which loosely recognises that part of these pension payments represent a return of capital. In comparison, other financial investments are subject to deeming rules that attribute a fixed rate of return to these investments, irrespective of how much income they actually produce.
The Government proposes that these normal deeming rules will apply to new superannuation account-based income streams commenced after 1 January 2015. All account-based pensions held by pensioners before 1 January 2015 will be grandfathered and the existing rules (e.g. access to the non-assessable portion under the income test) will continue to apply, unless the product is changed on or after 1 January 2015.
If you are looking to retire at or around 1 January 2015, it is important to work through your circumstances with your FinSec Planners adviser to see whether there is a financial benefit by commencing an account-based pension before or after 1 January 2015.
Pension earnings above $100,000 to be taxed at 15%
The Government proposes that from 1 July 2014, all earnings on assets supporting income streams will be tax-free only up to $100,000 per year. Earnings above $100,000 per year will be taxed at a rate of 15 per cent.
The Government estimates that this measure will only affect 16,000 superannuation members who are estimated to have superannuation balances of $2 million and over. However, when capital gains are taken into account further down the track, those will smaller balances may also be impacted.
Special arrangements will apply for capital gains on assets purchased before 1 July 2014. This will cause the CGT treatment of assets supporting income streams to have a three tiered structure over the next 10 years so that for:
- Assets that were purchased before 5 April 2013, the reform will only apply to capital gains that accrue after 1 July 2024;
- Assets that are purchased from 5 April 2013 to 30 June 2014, individuals will have the choice of applying the reform to the entire capital gain, or only that part that accrues after 1 July 2014; and
- Assets that are purchased from 1 July 2014, the reform will apply to the entire capital gain.
Capital gains that are subject to the tax will receive the 33 per cent discount, and will therefore be taxed at a rate of 10 per cent.
The Government has said it will ensure that members of defined benefit funds will be equally impacted by this change as members of accumulation funds. This will be achieved by calculating a notional earnings for each year a defined benefit member is in receipt of a concessionally taxed superannuation pension.
This could be a very complex measure to administer and there are a lot of unknowns at this stage including how this 15 per cent tax will be collected. Many retirees have multiple pension/annuity funds making it difficult to administer at fund level. If levied to the individual, new processes will have to be put in place by the ATO to consolidate information, calculate the tax and levy the bill.
Some other unresolved questions include:
- If capital losses in one fund or investment option will be able to be offset against capital gains in another fund or investment option; and
- How the capital gains component of managed fund distributions will be treated with the transitional rules.
Importantly, if you are aged 60 or over, pension payments and lump sum withdrawals will continue to be tax-free.
Housing Help for Seniors
The Government will trial a program from 1 July 2014 to 1 July 2017, to help older Australians downsize their family home and move to more suitable housing without adversely affecting their Age Pension. This will be achieved by providing a means test exemption on the excess proceeds under certain conditions.
The family home must have been owned for at least 25 years with at least 80 per cent of excess proceeds from the sale (up to $200,000) to be deposited into a special account by an authorised deposit-taking institution. These funds (plus earned interest) will be exempt from pension means testing for up to 10 years provided there are no withdrawals during the life of the account.
The exemption will also be accessible to individuals assessed as home-owners who move into a retirement village or granny flat. It will not be available to individuals moving into residential aged care.
At this stage it is not clear how funds in the special account will impact an eligible person’s partner who is receiving a social security entitlement other than a pension, such as Newstart Allowance. There has also been not clarification if this trial program will extend to Department of Veterans Affairs recipients.
Extending concessional tax treatment to deferred lifetime annuities
Deferred lifetime annuities (DLAs) will be eligible for the same concessional tax treatment that superannuation assets supporting retirement income streams receive from 1 July 2014.
DLAs are a form of longevity insurance offered in many countries, but not in Australia, due to unintended unfair taxation treatment. This reform will provide you with more choice in retirement by allowing you to allocate part of your superannuation to a product that will provide an ongoing income stream for life beyond a certain age.
Other measures that may be relevant to you
The Medicare Levy will increase from 1.5 per cent to 2 per cent as of July 2014 to fund the national disability insurance scheme, to be known as Disability Care Australia.
While this announcement will increase the amount of Medicare Levy people will pay on their taxable income, it will also increase the tax rates applicable to other amounts that include the Medicare Levy rate. These include:
- Excess non-concessional contributions tax 46.5% to 47%
- Tax on the taxable component of a superannuation lump sum benefit received by a taxpayer age 55 to 59 in excess of the low rate cap (currently $175,000) 16.5% to 17%
- Tax on the taxable component of a superannuation lump sum benefit received by a taxpayer under the age of 55 21.5% to 22%
- Tax on the taxable component of a superannuation lump sum death benefit paid directly to a non-death benefits dependent
– Taxed element – 16.5% to 17%
– Untaxed element – 31.5% to 32%
- Withholding tax on financial investments where no TFN is provided – 46.5% to 47%
– Fringe benefits tax – 46.5% to 47%
The increase in the Medicare Levy may also improve the tax effectiveness of a number of strategies. These include:
- Making salary sacrifice and personal deductible contributions more tax effective, as the Medicare Levy does not apply to these amounts
- Delaying the withdrawal of any taxable component as a superannuation lump sum benefit until after age 60, as the Medicare Levy does not apply to these amounts
- Arranging for a members death benefit to be paid to a non-death benefits dependent via the member’s estate, as the Medicare Levy does not apply to deceased estates
The net medical tax offset will be phased out. Importantly, the offset will continue to be available for out of pocket medical expenses relating to aged care fees until 1 July 2019.
Clients who are considering elective medical procedures that qualify as eligible out-of-pocket medical expenses i.e. major dental procedures may wish to bring forward the procedure and incur the expense in the 2012-13 financial year. This way they may be able to remain eligible for the NMETA for future years under the transitional arrangements.
Late registrations for the Pension Bonus Scheme will cease from 1 March 2014. The scheme has been closed since 20 September 2009 but has been allowing those eligible for the Scheme to register late.