The night of the Budget is a big event for me.
I admit that while I will readily accept the term ‘nerd’ as a compliment, I am not typically someone who hangs around waiting for the next finance report on ABC. Of course, I get inundated with updates and debriefs on all things financial every day, so if I turn the TV on, I prefer mindless entertainment. I won’t go into specifics for fear of judgement!
The Budget is an exception.
I turn the news on as soon as I can and hang on the Treasurer’s every word, while I am doing the most important part of my job – learning how the Government announcements will affect my clients.
Firstly, let’s talk about pension accounts.
The 50% reduction in legislated minimum pension payments has been extended to 30 June 2023. The need for this initiative to run over four financial years is clear, as we combat the increased level of market volatility caused by Covid 19. International asset classes have also suffered through the impact of the war in Ukraine, while locally we have experienced floods, draughts, and bushfires. It is unlikely that economic conditions will settle in the foreseeable future.
This reduction allows individuals aged between 65 and 74 to reduce or retain their pension payments at a low 2.5% per year. If you don’t need additional income to support your living expenses, the major benefit is the reduced requirement to sell down assets within your pension account, allowing your portfolio to spend more time in ‘recovery mode’.
Additionally, if you run a Self Managed Super Fund (SMSF) and have Members in both Accumulation (Super) and Pension, it can help to maximise the balance of your Fund held in retirement phase, where earnings are not taxable. It can also save brokerage costs, if you happen to be drawing pension income from a share portfolio within your SMSF.
If you are drawing a super pension, you may also be receiving Centrelink or Department of Veterans’ Affairs benefits.
If you are the recipient of Age Pension, DVA Pension, Carers Allowance, Disability Support Pension, or a number of other Service Australia payments, you will benefit from a one-off Cost of Living payment of $250 in April 2022.
If you have a Commonwealth Seniors Health Card, Veterans Gold Card or Pensioners Concession Card, you are also eligible.
$250 will not do much to cover the family essentials, but everything helps!
Along with the social security benefits, the government has announced that the Low and Middle Income Tax Offset (LIMITO) will increase.
A $420 ‘Cost of Living Tax Offset’ will be added for individuals falling within the income range of $48,000 and $126,000 per year. This will effectively increase the LIMITO to $1,500 per eligible individual this financial year.
The benefit will be payable when you complete your tax return for the 2021/22 financial year. Sadly, there has been no announcement on extending the LIMITO initiative passed this financial year.
The Medicare levy has also been increased by the Consumer Price Index. Given that revenue from the levy covers only 10% of the cost of health care in Australia, this is to be expected. The good news is, the Medicare levy income threshold has been increased, with the family threshold for seniors and pensioners at $51,401.
This time around there was very little news on the super side of things, aside from the removal of the $450 per month income threshold for Superannuation Guarantee eligibility; so we’ll spend some time revisiting last year’s Budget announcements.
In 2021 Frydenberg announced the potential removal of the work test for individuals aged 67 to 74. This would allow members to make voluntary post tax contributions to super without requiring them to be working 40 hours or more over a 30-day period.
If an individual contributed between those ages whilst they were retired, and no other special circumstances applied, they would risk breaching super rules. If the individual chose to leave that contribution in super, 47% tax would be payable. I am pleased to say, the removal of the work test will be effective on 1 July 2022.
The next major change for those who are retiring or transitioning to retirement is the extension of the bring forward rule. ‘Bring forward’ is a super strategy that allows an individual to use up to three years of their annual post tax contribution limit in one financial year. In dollar terms, at this time it is the difference between someone being able to contribute $110,000 or $330,000 the year they retire, as an example.
This flexibility has been widely used by our clients aged up to 67, but will now be available until individuals are 75 years old, effective next financial year.
Another important proposal was the plan to extend eligibility for ‘downsizer contributions’. This is where you have the option to increase the amount contributed to super following the sale of your home, under certain conditions. The strategy has been limited to clients aged 65 and older but will be available from age 60 as of July, which can provide individuals with the option to plan their retirement earlier.
If you have a disability and are looking to remain in the workforce in some capacity whilst you plan your retirement, more employment options may be available.
$44.6 million will be invested over two years from 2022 to 2023 to continue to support businesses who employ mature age Disability Employment Services participants. This will be provided through the Restart Wage Subsidy.
Aged Care funding and reforms have been a key of focus of both the Opposition and the government in power. Findings from the Royal Commission into Aged Care Quality and Safety were certainly concerning, and it is widely understood that increased government subsidies and private funding is critical to improve the quality of care across the country.
The Government has announced that they will contribute a further $468.3 million into the sector over the next five years to implement an effective response to highlighted training and governance inadequacies, along with another $458.1 million, to assist with managing the impact of Covid19 in the sector.
There will be a temporary reduction in the 44.2 cents per litre fuel excise to 22.1 over the next six months, which will alleviate the ludicrous cost of petrol for now, assuming petrol stations pass the reduction on to motorists.
Plenty of tax incentives will be available to encourage small business owners to invest in training and digital adoption.
The new home guarantee will be extended to allow more entrants into the property market.
Employee share schemes will also be expanded, and red tape will be reduced to allow for more monies to be directed to businesses and share markets.
As usual, we walk away from the Budget feeling a sense of ease, like we are being taken care of.
In reality, we know that times are difficult and a small incentive here and there is not enough to alleviate the financial pressure that market volatility, increased living costs and Covid19 has caused.
If a global pandemic has taught me anything, it is that planning for emergency events is critical.
A modern retirement plan will take advantage of the increased flexibility we have been afforded with regard to super contributions and pension payments, it will plan to maximise social security benefits and minimise tax. We will now instinctively add into our financial strategy a plan for the unexpected, such as sudden market downturns or insurable events.
We will consider contingencies, such as the possible need for Aged Care for you or your family in future years.
This is not pessimism, this is preparation.
We know now, more than ever, that it pays to be prepared!