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Last night the Federal Government handed down the budget for the impending financial year, and it is predicting a reduction to the record deficit last year ($213 billion) down to $161 billion, suggesting Australia is “on the mend” after the effects of covid last year. This article will explore the significant changes and what it means to you.
Removal of the work test for those age 67 to 74 – expected to be 1 July 2022
Those aged between 67 and 74 will no longer need to satisfy the work test (40 hours work within a consecutive 30 day period), in order to make non-concessional (post-tax) contributions to Super. To make tax-deductible contributions the work test must still be met. They have estimated this will come into effect from 1st July 2022, i.e. will not be available in the oncoming financial year.
What it means to you.
- This will potentially open doors to those aged between 67 and 74 who may have retired and have significant assets outside of Superannuation whereby earnings are being taxed. They will have the opportunity to move $110,000 a year of these assets into Super and possibly into Pension phase where there is no tax on earnings.
- Furthermore it may now enable recontribution strategies. If someone between 67 and 74 has a large taxable component in their Super or Pension account (most people do), this usually means a tax implication to their adult children in the event of their death. A recontribution strategy can reduce this taxable component.
Reduction in allowable age to make downsizer contribution from 65 to 60 – expected to be 1 July 2022
Currently, those over age 65 have the potential to sell their home (owned more than 10 years), and move up to $300,000 into Super (doesn’t form part of the concessional or non-concessional cap). The Government is hoping that from the 2021/22 financial year this will reduce to age 60.
What it means to you.
- If you are aged 60 to 64 and have sold your PPR and meet the criteria for a downsizers contribution, it may be prudent to use it, as opposed to making a large non-concessional contribution. As such this will potentially leave the non-concessional limit available to you. The non-concessional limit, inclusive of using the bring-forward rule will be $330,000 from the next financial year, meaning those aged between 60 and 64 now have the potential to move $630,000 into Super (and if desired into tax-free Pension phase). For a couple that’s a potential $1.26million going into Super, in theory, all on the same day!
- In some circumstances, it may be better to use the non-concessional limits first and save the ability to use the downsizers contribution for the future. (It can only ever be used once). Lifestyle factors, as well as financial objective, come into play, so talk to your adviser first before taking action on these strategies.
First Home Super Saver Scheme increasing from $30,000 to $50,000 – expected to be 1 July 2022
Currently, first home buyers are able to “release” $30,000 from their Super that they have contributed voluntarily as pre-tax contributions to use as a deposit for their first home. The Government is seeking to increase that amount to $50,000.
What it means to you.
- This legislation is effectively a very tax effective savings plan. You put money into Super pre-tax, saving between 6% and 34% depending on your tax rate, to then pull it out to buy your first property.
- If you have already been squirrelling away money with the intention to use this legislation and buy your first home, an increase to $50,000 may make that property purchase all the more realistic given rising property prices.
- One point to note is that you can only pull out a maximum of $15,000 that was contributed in a given financial year. As such with the current rules, you need a minimum of two financial years to hit the $30,000. The Government has not yet announced that it will increase this amount of $15,000. So unless anything does change, to take advantage of the $50,000 you’d be looking at a minimum of 4 financial years of personal contributions, e.g. $15k, $15k, $15k and $5k makes $50,000.
Removing the $450 per month minimum superannuation guarantee threshold – expected to be 1 July 2022
Currently, an employee must earn $450 within a month before the employer is legally obliged to make a Super Guarantee contribution. The Government plans to reduce this to Zero, meaning anyone earning employment income should receive Super payments. They hope to have this in force for the oncoming financial year.
What this means to you
- If you less than $450 in a month make sure your employer has Superannuation details on file for you and are paying in the SG payments.
- This may benefit those that work multiple jobs, where one may not result in $450 of earnings in a given month.
- This might help younger workers, perhaps those working a part time job while studying full time. The earlier you start receiving Super contributions the larger your retirement nest egg!
Complying pension and annuity conversions – effective first financial year following Royal Assent
The Government has announced that those with certain complying income stream products will be given a two-year window to commute and transfer them back into a Superannuation account in the accumulation phase. They can then decide whether to;
- commence a new account based pension,
- take a lump sum benefit or;
- retain the balance in the accumulation account.
The income streams affected by this measure include:
- market-linked income streams (otherwise known as Term Allocated Pensions),
- complying life expectancy income streams and
- complying lifetime income streams, that were first commenced prior to 20 September 2007 from any provider, including self-managed superannuation funds (SMSFs).
If this is you, your Hudson adviser can assist with the creation of accumulation and/or Pension accounts under one of our approved products.
Relaxing residency requirements for SMSFs and Small APRA Funds (SAFs) – expected to be 1 July 2022
These plans if implemented will relax the residency requirements for SMSFs. It’s all to do with the “central management and control test” that SMSFs mut adhere to. Currently SMSF trustees living overseas who intend to return to Australia at some point can be away for a period of up to two years. Under the proposal, the trustee will be able to be away for up to five years and still meet the test.
In addition, the “active member test” will be abolished. Currently, if the SMSF had members that were ‘active’ by making contributions or rollovers into the fund, the residency status of the fund could be jeopardised meaning that members who are overseas for a period of time often cannot make contributions to their SMSF or SAF. This is unlike those in industry/retail funds who can contribute large amounts without putting the fund’s residency status at risk.
Doing away with this test levels the playing field.
Superannuation related proposal that is NOT proceeding – Early release of Super for victims of family and domestic violence
Personal income tax cuts – retaining the low and middle income tax offset (LMITO) for the 2021-22 income year – effective 1 July 2021
The LMITO was applicable for the 2021 financial year but was set to end. It has now been proposed to continue for the 2022 financial year. It provides a tax reduction of up to $1,080.
What it means to you.
- For those earning below $37,000 the maximum offset is $255.
- For those between $37,001 and 48,000 it is $255 plus 7.5c for every dollar up to a maximum of $1,080.
- Between $48,001 and $90,000 it is $1,080.
- Between $90,001 and $126,000 it is $1,080 minus 3c for every dollar above $90,000.
- Above $126,000 income … no benefit.
So for anyone earning between $48k and 90k you will now be just over $1,000 better off thanks to the extension of these rules.
Modernising the individual tax residency rules – effective 1 July following Royal Assent
Back in 2019 the Board of Taxation released a report to reform individual tax residency rules and their proposed changes will finally come to fruition. Under current rules, the primary test for deciding the residency status of an individual is whether the individual resides in Australia according to the ordinary meaning of the word ‘resides’. If they do not, there is a complex process to decide if they qualify as a resident or not. It’s been found that many individuals end up paying extensive accounting fees due to the complexity.
The proposal is to simplify the definition, specifically to do with whether the individual has spent at least 183 days in the country. They want it to be easier to understand and apply in practice. It is designed to deliver greater certainty and lower compliance costs for globally mobile individuals and their employers.
What it means to you.
- If you spend a significant amount of time overseas you should consult your accountant to see how these changes may impact you.
Increasing the Medicare Levy low-income thresholds – effective 1 July 2020
The Government will increase the Medicare levy low-income thresholds for singles, families, and seniors and pensioners from the 2020-21 income year.
What it means to you.
- The changes are marginal but if you earn below $40,000 you will likely pay a little less Medicare levy.
BUSINESS TAX INCENTIVES
Extending temporary full expensing – effective 6 October 2020
This has been available since October last year. Businesses with aggregated annual turnover within the relevant threshold will be able to deduct the full cost of eligible capital assets
- Full expensing in the year of first use will apply to new depreciable assets and the cost of improvements to existing eligible assets for businesses with aggregated annual turnover of less than $5 billion.
- Full expensing also applies to second-hand assets for small and medium sized businesses with aggregated annual turnover of less than $50 million.
Full expensing does not apply to second-hand assets for businesses with aggregated annual turnover of $50 million or more.
Extending temporary loss carry-back – effective from 2019-2020
This was effective from last financial year. Ordinarily, companies are required to carry losses forward to offset profits in future years. The Government has announced that it will extend the temporary loss carry-back measure a further 12 months to allow companies with aggregated annual turnover of less than $5 billion to carry back tax losses from 2019-20, 2020-21, 2021-22 or 2022-23 income years to offset previously taxed profits in the 2018-19 or later income years.
Companies that do not elect to carry back losses under this measure can still carry losses forward as normal.
Increasing the flexibility of the Pension Loans Scheme – effective 1 July 2022
The Pension Loans Scheme is a voluntary, reverse mortgage type loan available through Services Australia and currently allows a fortnightly loan of up to 150% of the maximum rate of Age Pension.
There are two major changes proposed:
1. A “No Negative Equity Guarantee” will be introduced so borrowers, or their estate, will not have to repay more than the market value of their property, in the rare circumstance where their accrued loan debt exceeds their property value.
2. Lump sum advances. Eligible people will be able to receive one or two lump sum advance payments totalling up to 50% of the maximum Age Pension each year. Based on current Age Pension rates, this is around $12,385 per year for singles and around $18,670 for couples combined
What this means to you.
- For those that don’t want to leave their home in retirement and as such may find themselves “asset rich but cash poor” this can be a means to increase income without the need to move on.
Four-year Newly Arrived Resident’s Waiting Period (NARWP) – effective 1 Jan 2022
Under current rules new residents to Australia may wait 1, 2 or 4 years before they are entitled to welfare payments or concession cards. The Government is seeking to simplify this to a simple “4 year rule”.
Increased support for unemployed Australians – effective 1 April 2021
The government has made a number of changes to working age payments, some of which were legislated as at 1 April 2021:
- the base rate of working-age payments has been increased by $50 per fortnight, applying to JobSeeker, Youth Allowance, Parenting Payment, Austudy, ABSTUDY Living Allowance, Partner Allowance, Widow Allowance, Special Benefit, Farm Household Allowance and for certain Education Allowance recipients under the Dept of Veterans’ Affairs.
- the income-free area of certain working-age payments has been increased to $150 per fortnight. This applies to JobSeeker, Youth Allowance (other), Parenting Payment Partnered, Widow Allowance and Partner Allowance
- the temporary waiver of the Ordinary Waiting Period for certain payments was extended to 30 June 2021
- the eligibility criteria for JobSeeker Payment and Youth Allowance (other) for those required to self-isolate or care for others as a result of COVID-19 was extended to 30 June 2021
- face-to-face servicing for job seekers has recommenced, implementing a graduated return in job search requirements from 15 per month from April 2021 to 20 per month from July 2021, and mandating job seekers in online employment services to complete their career profile in the jobactive system, to allow better job matching.
Increase in child care subsidy – effective 11 July 2022
The Government announced it will:
- increase the Child Care Subsidy (CCS) rate by 30 percentage points for the second child and subsequent children aged five years and under in care, up to a maximum CCS rate of 95% for these children, commencing on 11 July 2022, and
- remove the CCS annual cap of $10,560 per child per year commencing on 1 July 2022. This will provide greater choice to parents who want to work an extra day or two a week.
What this means to you.
- Removing the annual cap helps support the choices of parents to work the hours they want to work and, in particular, reduces barriers that secondary income earners face when seeking to work more. The current hourly fee caps will continue to apply.
Increased funding for Home Care – effective 1 July 2021
To support senior Australians to remain at home, the Government is funding an additional 80,000 Home Care packages, 40,000 to be released in the oncoming financial year and 40,000 the year after.
They are significantly increasing funding for residential aged care.
If you wish to speak to an Adviser at Hudson Financial Planning, please call direct on 1800 804 296 or submit a contact form directly on our website.