2010-2011 Federal Budget Review: A financial planning perspective

Wednesday 07 July 2010

By Tom Harris
Accru Wealth Management, Melbourne

‘Sound’, ‘Boring’, ‘No Frills’ – all descriptions of Wayne Swan’s 2010 budget.  However there were a few sweeteners, such as the concessional tax treatment for certain non-super investments, which will be of interest to many Accru clients. What are the changes and opportunities created? Accru Melbourne’s financial planner Tom Collins provides a snapshot of these from a financial planning perspective.

Superannuation

 

Government superannuation co-contribution
The Government will permanently match eligible personal non-concessional superannuation co-contributions of up to $1,000 (rate retained at 100%). The Government co-contribution decreases by $0.03333 for every dollar earned in excess of $31,920. The income thresholds will also be frozen at $31,920 and $61,920 for the next two years. If eligible, the Government matching your $1,000 contribution is a great way to boost your superannuation. Often this is used as a strategy to fund life insurance in superannuation.  

Concessional contributions (CC) cap increase
It has been previously announced that the CC cap for those aged 50 or more will reduce from $50,000 to $25,000 from 1 July 2012.  For those aged 50 or more with total super balances under $500,000 the $50,000 CC cap will be retained. This measure will greatly assist those people employing salary sacrifice and transition to retirement strategies. Care will need to be taken for people with balances close to $500,000; contribution splitting strategies may assist here.

Minimum pension reduction not extended
In recognition of the impact of the global financial crisis, the minimum payment required out of superannuation pensions was halved for 2008/09 and 2009/10. This temporary reduction will not apply for the 2010/11 income year.

Super contributions tax rebate for low income earners
The Government will make a super contribution of up to 15% of the concessional contributions for individuals on adjusted taxable incomes of up to $37,000, subject to a maximum limit of $500. This will apply from 1 July 2012.

Superannuation Guarantee age limit to increase from 70 to 75
The superannuation guarantee age limit increases from 70 to 75 commencing 1 July 2013. An estimated 30,000 workers will benefit from this change.

First Home Saver Accounts

 

The Government has announced changes to First Home Saver Accounts (FHSA) to provide for more flexibility. Previously, if a home was purchased during the four-year qualifying period funds were disallowed from being paid into the mortgage (the balance was required to be rolled into superannuation). However, this has now changed to allow funds to be paid into an already established mortgage. FHSA will still offer the existing concessions, which include:

• The Government contributes 17% on the first $5,000 (indexed) of individual contributions made each year. This means an individual who makes a contribution of $5,000 to their FHSA will be eligible for a Government contribution of $850.
• There is a cap of $75,000 (indexed) on the overall FHSA balance. If an individual reaches the cap, no further individual contributions can be made by the FHS Account holder.
• However, the FHSA interest earnings and outstanding Government contributions will still be credited to the FHSA after this time, allowing the account to continue to grow.
• Earnings are to be taxed at 15% and withdrawals will be tax free where they are used to purchase a first home.
  

The change should provide greater confidence for those who are saving for their first homes to invest using a FHSA and gain the tax benefits associated with doing so. Parents and grandparents may want to assist a young adult with contributions to help save for a home and maximise the Government contribution of 17% on contributions up to $5,000 per year. Currently competitive interest rates offered by providers are 6.25%. 

 

Taxation

 

Changes to personal tax rates

2009/2010 Rates    From 1 July 2010
Taxable income      Rate    Taxable income     Rate
0- $6,000                   0%           0- $6,000            0%
$6,001 - $35,000       15%    $6,001 - $37,000      15%
$35,001 - $80,000     30%   $37,001 - $80,000     30%
$80,001 - $180,000   38%   $80,001 - $180,000   37%
$180,001+                45%        $180,001+           45%

Low Income Tax Offset
The Low Income Tax Offset will increase from $1,350 to $1,500 for 2010/11, decreasing for income above $30,000 by 0.04 cents for every dollar to a maximum of $67,500. A Melbourne tabloid newspaper reported that tax free threshold was being raised to $16,000. It isn’t. However a taxpayer who benefits fully from the offset will have an effective tax free threshold of $16,000.

Standard rate of tax deductions
The Government proposes to allow a standard deduction of $500 for work-related expenses and the cost of managing tax affairs from 1 July 2012. From 1 July 2013 the standard deduction will increase to $1,000. Those with deductible expenses greater than the standard deduction amount will still be able to claim their higher expenses in the usual way. This will be an appealing option for those who are employed on a salary with little to claim. Those with investments are likely to continue to claim actual expenses.

50% discount for interest income
A 50% tax discount on interest earned up to $1,000 will apply for individuals, from 1 July 2011, including interest on deposits held with banks, as well as bonds, debentures or annuity products. The discount will be available for interest income earned directly as well as indirectly, such as via a trust or managed investment scheme. If for example, a person is earning an average pre-tax interest rate of 6.5%, the discount would apply up to a savings balance of $15,385.

Increase in the medical expenses tax offset claim threshold
The threshold above which a taxpayer may claim the net medical expenses tax offset (NMETO) is to increase from $1,500 to $2,000 from 1 July 2010, and is to be indexed to CPI from 1 July 2011. The NMETO currently allows taxpayers to receive a tax offset equal to 20% of net unreimbursed eligible medical expenses above $1,500.

Capital protected borrowings
The Government has announced it will adjust the benchmark interest rate that applies to capital protected borrowings to the RBA indicator rate for standard variable housing loans PLUS 100 basis points. This is to apply to capital protected borrowings entered into from 7.30pm, 13 May 2008. This results in a higher deduction than previously announced in the 2008 budget.

Parental Leave
In the 2009 Federal Budget the Government announced its Paid Parental Leave scheme which provides 18 weeks of leave at the level of the national minimum wage to eligible new mothers from 1 January 2011. The Government will provide funding ($21.2 million over five years) for the implementation of the scheme. Introduction is now less than 9 months away!