06 Nov Federal Budget Review 2013

This year’s Federal Budget had plenty of cuts and very few goodies for an election year, as the Government looked for further savings. From an investment perspective there’s little of note, especially as most of the superannuation reforms had previously been announced.

Surplus

There’s no more ‘back in black’ talk and the forecast 1.5bn surplus has evaporated. The budget is now forecast to be in deficit until 2015-16 and back into surplus by 2016-17.

However, given the quick erosion of this year’s predicted surplus, we should be wary of rosy forecasts that may be based on unrealistic assumptions with little regard for economic headwinds.

While Wayne Swan underlined the inherently unreliable business of forecasting, “the truth is that the global economy is capable of changing dramatically, quickly, and having different effects on the (Australian) economy at different times,” Treasury haven’t exactly erred on the cautious side in the past and their future predictions appear to be quite optimistic.

Superannuation a quick reminder:

There’s an increase in the concessional contributions cap. Currently $25,000 for everyone, this will increase to $35,000 for those over 60 from 1 July 2013, while for those over 50 the increase to $35,000 comes on 1 July 2014.

Excess contributions will now be taxed at marginal rates, or there’s the option to withdraw them from the superannuation environment. Previously any excess contributions were hit with a top tax rate penalty. Applies to all excess contributions from 1 July 2013.

There is a reduction in the superannuation concessions for those who earn over $300,000 a year. These individuals will have to pay an additional 15% tax on their concessional contributions.

Income streams will be deemed from 1 January 2015, however this will only be for income streams started after that date. All pension income streams started before this date will be grandfathered under present rules.

Superannuation pension earnings above $100,000 will be taxed at 15% from 1 July 2014. However withdrawals (lump-sum and pension) will remain tax free for those over 60.

Deferred lifetime annuities will receive the same concessional tax treatment applying to investment earnings on assets supporting pensions.

Personal Tax

The abolition of proposed tax cuts from July 2015. Not a great issue here, the cuts never came into existence so they’re not going to have an impact on anyone’s wallet.

Medicare Levy

The Medicare Levy will increase from 1.5% to 2% from 1 July 2014; this is being introduced to pay for the National Disability Insurance Scheme (NDIS). Low income earners will continue to receive relief from the Medicare levy through low income thresholds.

Net Medical Expenses Tax Offset

This will be progressively phased out. For most people this will be on 1 July 2013, but for those in aged care or suffering significant disability this will be abolished by 2019 when DisabilityCare Australia is fully functional and aged care reforms have been fully implemented.

Baby Bonus

The previous $5,000 will be replaced with a $2,000 payment to those receiving Family Tax Benefit Part A for the first child and $1,000 for subsequent children.

Family Tax Benefits

The government will freeze indexation on the eligibility thresholds and amounts paid for Family Tax Benefit A & B.

Exempting the proceeds from downsizing the family home

An interesting idea, which will run as a trial program from 1 July 2014 to 1 July 2017.

There is a belief that many older Australians would like to downsize their home, but are reluctant to do so as the excess proceeds from the sale would affect their age pension. Under this scheme the government would offer a 10 year means test exemption on those excess proceeds and income earned on them.

However, to qualify, the family home must have been owned for 25 years and at least 80% of the proceeds (up to $200,000) must be deposited into a special account at an authorised deposit taking institution.

Summary

There’s one important takeaway from many of these changes – they’re yet to be legislated. Given current political polling there’s the reality some changes may never see the light of day.

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