Financial Planning Tips from the 2009 Budget
Posted: June 23, 2009
The 2009 federal budget, handed down on 12 May has had a mixed reception.
Amid the political debate, it can be difficult to decipher what actually applies to you. This section is designed to provide an overview of the changes that are most applicable to investors with long-term financial plans.
The main changes that may affect retirees include those related to superannuation, government pensions, account-based pensions, health care, aged care and taxation. We have not commented on the proposed changes to employee shares schemes as there is currently a great deal of uncertainty as to what might happen in the area.
1) Superannuation
a) Concessional Contributions Caps Halved
From 1 July 2009 until 30 June 2012, individuals aged 50 and over may contribute a maximum of $50,000 (previously $100,000) to superannuation—in the form of salary sacrifice arrangements, employer contributions or personal contributions where a tax deduction is being claimed. Contributions exceeding this cap will be taxed at 31.5 per cent on top of the fund’s concessional rate of 15 per cent.
While this may seem harsh and does nothing to encourage retirement savings many approaching retirement will need to consider alternatives (again).
b) Super Co-Contribution Reduced
From 1 July 2009 until 30 June 2012, individuals with a taxable income of less than $30,342 pa will receive a maximum of $1,000 (previously $1,500) government co-contribution if a non-deductable personal superannuation contribution of at least $1,000 is made.
The good news is that for every dollar earned over $30,342 pa, the co-contribution will be reduced by only 3.333 cents (previously 5 cents) up to $60,342 pa, over which no co-contribution will be paid.
2) Government Pensions
a) Changes to Pension Payments
From 20 September 2009, single full pensioners will receive an additional $32.49 per week, which consists of $30 increase in the fortnightly pension and a $2.49 increase in the pension supplement. This supplement includes the value of the current GST pension supplement, and allowances for pharmacy, utilities and telephone, all in one payment.
Couples will receive an additional $10.14 per week, which simply reflects an increase in the new pension supplement.
If all additional allowances are received (excluding remote allowance) the maximum fortnightly payment equates to $710.78 ($18,480.28 pa) for singles and $1187.50 ($30,875.00) for couples.
According to the figures released by the Westpac ASFA Retirement Standard (RS) on 16 April 2009, the new pension rates are marginally closer to meeting the average costs for a modest lifestyle. The following table summarises the RS budget for various households and living standards, however, these figures assume retirees own their home.
| Total Fortnightly Expenses | Total Annual Expenses | |
|---|---|---|
| Modest lifestyle – singles | $746.02 | $19,397 |
| Modest lifestyle - couples | $1,049.66 | $27,291 |
| Comfortable lifestyle - singles | $1,442.98 | $37,517 |
| Comfortable lifestyle - couples | $1,933.70 | $50,276 |
b) Gradual Change to Qualifying Age
By 2023 the qualifying age to be eligible for the Age Pension will have gradually increased from 65 to 67. Only new pension applicants from 1 July 2017 will be affected by this change.
c) Change in Income Test Payment Reduction for Part Pensioners
Currently, single pensioners can earn up to $138 per fortnight and couples can earn up to $240 per fortnight before the pension payable is reduced. From 20 September, the amount that the pension will be reduced for every dollar earned over these thresholds will be 50 cents for singles and 25 cents for couples.
d) Part-time Working Pensioners Rewarded
To encourage participation in the work force by pensioners, only half of the first $500 in fortnightly income sourced from part-time employment will be included in the income test.
This Work Bonus can result in a maximum benefit of $125 each fortnight. The Pension Bonus Scheme will be closed to new entrants from 20 September 2009 to give way to the Work Bonus Scheme, designed to encourage more pensioner participation in the work force to supplement their income and lifestyle. Existing members of the Pension Bonus Scheme will continue to receive their bonus under existing rules.
3) Account-Based Pensions
a) Minimum Draw-downs From Account-Based Pensions
For the financial year 2009–10, the minimum annual draw-down required from an account-based pension will again be reduced by 50%. The minimum annual payment is calculated as a percentage of the account balance at the start of the financial year.
| Age | Minimum Annual Drawdown | |
|---|---|---|
| Standard Rate | Reduced Rate (50%) | |
| Under 65 | 4% | 2% |
| 65-74 | 5% | 2.5% |
| 75-79 | 6% | 3% |
| 80-84 | 7% | 3.5% |
| 85-89 | 9% | 4.5% |
| 90-94 | 11% | 5.5% |
| 95 and over | 14% | 7% |
b) Commonwealth Seniors Health Card (CSHC)
The proposal from the 2008–09 Federal Budget to include income from gross tax-free superannuation pension income in the income test to determine eligibility for a CSHC has been abolished.
Eligibility for CSHC is determined by assessment of an individual’s or couple’s annual adjusted taxable income (ATI). ATI is calculated by adding taxable income plus net investment losses, foreign income not normally taxed in Australia and employer provided Australian fringe benefits. From 1 July 2009, the ATI will also take into account salary sacrifice and deductible personal super contributions.
Apart from being Australian residents, living in Australia and being of age pension age, to qualify for a CSHC, individuals must have an ATI of less than $50,000. Couples may have an ATI of up to $80,000 and couples separated by ill health may have a combined income of up to $100,000.
4) Health
a) Medicare Levy Low Income Threshold Increased
The Medicare levy low income threshold has been increased to $17,794 for individuals and $30,025 for families effective from 1 July 2008.
b) Private Health Insurance Rebates to be Means Tested
From 1 July 2010, only individuals earning less than $75,000 or families earning less than $150,000 will retain the existing health fund rebate of 30 per cent. Those aged over 65 earning under these thresholds may receive a higher rebate, although income that is referred to in this context refers to income used to assess the Medicare Levy Surcharge.
From 1 July 2009, the income definition for the Medicare Levy Surcharge will encompass taxable income plus fringe benefits, salary sacrifice and personal deductable super contributions and net investment losses. For those aged between 55 and 59, the first $145,000 of taxed superannuation lump sums may be subtracted.
Therefore, the strategy of salary sacrificing for a rebate or to avoid a Medicare Levy Surcharge is no longer viable.
5) Changes to Personal Tax Rates
The tax rate cuts announced in the 2008-09 Federal Budget will apply from 1 July 2009:
| Income threshold | Tax rate |
|---|---|
| $0 - $6,000 | 0% |
| $6,001 - $35,000 | 15% |
| $35,001 - $80,000 | 30% |
| $80,001 - $180,000 | 38% |
| $180,000+ | 45% |
Conclusion
A combination of these changes may greatly affect your existing financial planning strategies, particularly if you are a self-funded retiree or in the process of transitioning to retirement. Remember that many of these changes take place from 1 July 2009.
It will be important for many to review the potential impact of these changes with their Avenue adviser.