IMPORTANT UPDATE Number 3 - 21st May, 2014
THE FEDERAL BUDGET UPDATE
After weeks of being told that all Australians had do their share of the “heavy lifting” to help clean up the budgetary mess left by the previous government, most of the work seems to have fallen on the ordinary Australian household! In a nut shell, if you are unemployed, older, disabled, have a family or drive a car, expect to be hit in the hip pocket. Corporate Australia on the other hand has received a 1.5% tax cut!
So what exactly does Joe’s first budget mean for us all?
Temporary Budget Repair Levy:
If you earn under $180,000 the good news is that you don’t have to worry – you are not affected. If you earn above this amount, from 1 July 2015 and for the next 3 years, your tax rate is effectively increasing by 2% on the income above the $180,000 limit. While you can use strategies like salary sacrifice of superannuation and some insurance’s to reduce your income, the fringe benefits tax rate will also be increased to ensure that you cannot salary package your way out of the levy.
Dependent Spouse and Mature Age Worker Tax Offsets:
At the opposite end of the scale, those entitled to the dependent spouse tax offset and mature age worker tax offsets will lose this benefit from 1 July 2014 and consequently will pay more tax.
There is good news for those who exceed their non-concessional contributions cap (contributions from after tax money). Previously, these excess contributions attracted a penalty tax of 46.5%. For contributions made from 1 July 2013, you should be able to withdraw excess after tax contributions from super (with no tax penalty) plus any associated earnings, with those earnings being taxed at your marginal tax rate.
You will also have the opportunity to leave the excess contributions and earnings in super, BUT, in this case the existing rules continue to apply and the excess contributions will be taxed at the highest marginal tax rate.
Super guarantee changes - again:
Super guarantee is still going to increase to 12%, but the time frame has been delayed. SG will go to 9.5% from 1 July 2014 and will remain frozen at 9.5% until 30 June 2018. Thereafter it will increase by 0.5% until it hits 12% on 1 July 2022.
Private health insurance changes and Medicare Levy Surcharge:
Income thresholds for determining the Private Health Insurance Rebate and the Medicare Levy Surcharge will NOT be indexed for 3 years from 1 July 2015. This means that as your salary and wages increase over this period, you may push through the threshold resulting in either a lower rebate or a higher surcharge. Either way it will probably cost you something!
The Medicare Levy and health costs:
Medicare Levy threshold
From 1 July 2013, the Medicare levy low‑income threshold for families will increase to $34,367 plus an additional $3,156 for each dependent child. This means that families with combined income below this figure do not need to pay the Medicare levy. However, low income threshold for singles and pensioners remains unchanged from last year.
Doctor’s fees – the patient co-contribution
Going to the doctor will also cost you more from 1 July 2015. Effectively the government has reduced the rebate it pays by $5.00 and will allow doctors to charge a $7.00 “co-contribution”. This announcement also allows patients to be charged at hospital emergency departments for general practitioner type consultations. For patients with concession cards and children under 16, this charge only applies for the first 10 visits in a year.
Pharmaceutical Benefits Scheme
Co-payments under the Pharmaceutical Benefits Scheme will also increase from 1 January 2015 by $5.00 for general patients (up to $42.70) and by $0.80c for concessional payments (up to $6.90).
Medicare Safety Net
A new Medicare Safety Net will replace the old arrangements from 1 January 2016. The Safety Net provides financial assistance for out-of-hospital services that attract a Medicare benefit. Once you reach the relevant threshold, the Safety Net will pay 80% of any subsequent out-of-pocket expenses, capped at 150% of the Medicare Benefits Schedule fee. There will be new safety net thresholds of $400 for concessional singles and concessional families, $700 for non‑concessional FTB‑A families and non‑concessional singles, and $1,000 for non‑concessional families who do not receive FTB‑A.
Pensions, Centrelink and family benefits
Between 1 July 2025 and 1 July 2035, the qualifying age for the Age Pension is going to gradually increase to age 70. The good news is that if you were born before 1 July 1958 you will NOT be affected. The table below summarises the changes:
Date of birth between
“Age Pension” Age
1 January 1957 and 30 June 1958
1 July 1958 and 31 December 1959
1 January 1960 and 30 June 1961
1 July 1961 and 31 December 1962
1 January 1963 and 30 June 1964
1 July 1964 and 31 December 1965
1 January 1966 and later
Pension and payment thresholds:
Eligibility thresholds for certain pension and non-pension payments will be frozen for three years. From 1 September 2017, pension and pension related payments including Bereavement Allowance, Age Pension, Disability Support Pension, Carer’s Payment and Veterans’ Affairs pensions will be frozen at then current levels. From 1 July 2014, the same will be true for a number of non- pension payments including Family Tax Benefit, Child Care Benefit, Child Care Rebate, Newstart Allowance, Parenting payments and Youth Allowance.
Indexation of pension and pension equivalent payments
The Government will index pension and equivalent payments and Parenting Payment Single by the Consumer Price Index (CPI). This measure will commence on 1 July 2014 for Parenting Payment Single recipients and from 1 September 2017 for Bereavement Allowance and pension payments such as: Age Pension; Disability Support Pension; Carers Payment and Veterans' Affairs pensions.
Currently, these payments are indexed in line with the higher of the increases in the CPI, Male Total Average Weekly Earnings or the Pensioner and Beneficiary Living Cost Index so the lower level of indexation will mean that you will need to supplement your income from other resources in order to maintain the same standard of living.
The Government also announced changes to the pension Deeming Rates. Financial assets above the deeming thresholds are “deemed” to be earning you income (whether they do or not) and this deemed income acts to reduce your pension or income support payment. It was announced that deeming thresholds will be reset from 20 September 2017 to $30,000 for singles and $50,000 couples. Lower thresholds mean higher deemed assets and income, which in turn acts to reduce pension and income support payment entitlements.
The Commonwealth Seniors Health Card (CSHC) is currently available to those with assessable income below $80,000. This threshold is currently unindexed. The good news is that from 20 September 2014, this threshold will be indexed to the CPI thereby allowing greater access to more people.
However, the flip side to announcement was that they are widening the income net to include “untaxed” superannuation income under the above threshold. The assessment of superannuation income will now be the same for CSHC holders as for age pensioners and will align with the new rules to deem account‑based pensions from 1 January 2015.
Grandfathering of existing arrangements prior to 1 January 2015 is available so if you are approaching pension age, it may pay to talk to your financial planner.
Seniors Supplement for Commonwealth Seniors Health Card holders
The Government will cease providing the Seniors Supplement for holders of the CSHC from 20 September 2014. Eligible seniors who do not receive a pension will continue to be eligible for a concession card.
The age of eligibility for Newstart Allowance and Sickness Allowance will increase from 22 to 24 years of age, from 1 January 2015. Existing recipients at this time retain their existing benefits.
Mature age workers:
In an effort to encourage longer workforce participation and be consistent with an increasing Age Pension expectation, from 1 July 2014, a payment of up to $10,000 will be available to employers who hire a mature age job seeker aged 50 years or over.
Participation incentives for under 30 job seekers:
From 1 January 2015, new applicants for Newstart and Youth Allowance under 30 years of age must be involved in job search and employment services support for six months before receiving payments. After six months, claimants will be required to participate in the Work for the Dole scheme to receive income support. Certain exemptions will apply.
All job seekers
From 15 September 2014, all job seekers who refuse any work without a good reason or consistently do not comply with the rules will lose their payment for eight weeks.
Participation requirements for under 35s
From 1 July 2014, certain recipients of the DSP under 35 years of age will be required to participate in compulsory work focused activities focused on getting them back into the workforce. Sanctions for non-compliance will be introduced. Also, from 1 January 2015, DSP recipients will only be able to leave Australia for 4 weeks in 12 months before losing their pension. There are some exemptions.
Family benefits and entitlements
Generally, the Government has moved to tighten eligibility, reduce income and asset test thresholds and freeze entitlement levels for up to 2 years generally making harder to get or keep these benefits. An overview of some of the key changes is summarized below:
Paid Parental Leave
From 1 July 2015, the Government will introduce a Paid Parental Leave scheme with an income cap of $100,000 per annum, which will include superannuation contributions.
Family Tax Benefit payment rates
Family Tax Benefit (FTB) payment rates will be frozen for two years from 1 July 2014. Indexation of the maximum and base rates of FTB-A, and the rate of FTB-B will be paused until 1 July 2016.
Targeting of Family Tax Benefit Part B
FTB‑B primary earner income limit will be reduced from $150,000 per annum to $100,000 per annum, from 1 July 2015.
New Family Tax Benefit allowance
A new allowance will be introduced for single parents on the maximum rate of FTB-A whose youngest child is aged between six and twelve years old from the point when they become ineligible for FTB-B. This allowance will provide $750 for each child aged between six and twelve years old in an eligible family from 1 July 2015.
Limiting Family Tax Benefit Part B
FTB‑B will be limited to those whose youngest child is younger than six years old from 1 July 2015.
As a transitional arrangement, families with a youngest child aged six and over on 30 June 2015 will remain eligible for FTB‑B for two years.
Other Budgetary Changes
Fuel excise indexation
From 1 August 2014, biannual indexation of the fuel excise is being re-introduced. Given the reliance of most families on their cars and prevalence of road transport, you can expect this move to hit the hip pocket as it affects everything from taking the kids to sport to the price of food at the supermarket.
Company tax rate cut
The company tax rate will be cut by 1.5 per cent to 28.5% from 1 July 2015. One of the major impacts for investors will be the fact that franking credits will also reduce from the current 30% to 28.5% thereby reducing the effectiveness of imputation strategies.
Higher Education Loan Programme (HELP) repayments
From 1 July 2016, HELP debts will be repayable at a lower income threshold – approximately $50,000. A new repayment rate of 2 per cent of taxable income will apply to debtors with incomes above this threshold. In addition, the annual indexation applied to HELP debts will be adjusted from the CPI to a higher rate that equates to the yield on 10 Government Bond, but capped at 6.0 per cent per annum.
Generally, these changes make HELP loans less attractive and they will no longer be as cheaper form of funding as they were. There may be a greater incentive to pay fees upfront and / or to voluntarily repay debts early.
First Home Savers Accounts (FHSA)
FHSA accounts opened at any time after Budget night will no longer qualify for concessions. From 1 July 2014, the Government co-contribution currently paid will also cease. From 1 July 2015, the existing tax concessions and social security income and asset test exemptions will cease. From 1 July 2015, FHSA will be treated like any other account and all restrictions on withdrawals will end.
Source: Budget 2014-2015 Budget Measures Budget Paper No. 2 2014-15 published on www.budget.gov.au
Disclaimer: The author is Dollar Growth Financial Planning Pty. Ltd. a Corporate Authorised Representative (no: 321108) of Hunter Green Pty Ltd. AFSL: 225962 ABN: 12 087 491 629. Any advice contained herein is general advice only and does not take into consideration the reader’s personal circumstances. Any reference to the reader’s actual circumstances is coincidental. To avoid making a decision not appropriate to you, the content should not be relied upon or act as a substitute for receiving financial advice suitable to your circumstances. The material contained herein is provided in good faith and is believed to be reliable and accurate. To the extent it is permissible by law, however, no liability is accepted for errors or omissions or for loss or damage suffered by any person as a result of inaccuracies in the publication.