Most Federal Budgets can be fairly described as boring; not this one! There are few people who won’t be directly impacted by some of the measures announced, though certain proposals may struggle to get through the Senate; others measures don’t have any impact for years to come. In the name of being responsible and strengthening the country’s finances, the budget inflicts some pain on nearly all sections of the population. A summary of what you need to know is available here. There is not expected to be any major impact on either the property market or the share market and the outlook for interest rates is unchanged. The Bad News: Most younger people under 30 lose any right to unemployment benefits for six months, university students starting in 2016 will almost certainly pay more for their degrees, an estimated two million families will lose part or all of their family tax benefit payments, almost all people will pay at least $7 for a doctor’s visit and for pathology, motorists will pay a little more for petrol, an estimated 400,000 high income earners will pay a new 2 per cent tax levy for the next 3 years and tighter means testing and less generous indexation of age pensions will impact pensioners in future years.Also, the States will lose very significant health and education funding from the Commonwealth so that will likely lead them to call for an increase in the GST as they have limited other sources of funding to fall back upon. Foreign aid also suffers a big cutback. The Good News: There is some good news in areas such as medical research and spending on roads even though it is probably fair to characterise it as the toughest budget since 1997. Many people will be pleased that there are no significant changes to Superannuation other than a deferral in the scheduled increases in Super Guarantee (SG – employer contributions). There will be an increase in SG from 9.25% this year to 9.5% in 2014-15 but then a freeze for 4 years i.e. it will be 2018-19 before the next increase to 10.0%. The previously legislated increases in the contributions caps have been retained. For example, this will mean that the concessional contribution cap for those aged 50 or more increases to $35,000 in 2014-15 and the non concessional cap for everyone increases to $180,000 p.a. The preservation age for withdrawing superannuation benefits was not changed but is likely to pushed out in the future. Also, the Government says it remains committed to cutting the company tax rate by 1.5% to 28.5% from 1 July 2015 so this will benefit small businesses. For larger businesses – those with taxable income over $5 million p.a. – the cut to 28.5% will only offset the 1.5% levy required to be paid to pay for the Paid Parental Leave scheme. Investors will be pleased that the Government introduced no changes to negative gearing or capital gains tax. There were no significant changes to fringe benefits and salary packaging arrangements. The Deficit & Debt As a result of all these Budget measures the underlying deficit is expected to narrow from 3.1% of GDP in fiscal year 2013/14 to 1.8% in 2014/15 and 1.0% in 2015/16 and less than 1.0% in the following two years. A return to surplus is forecast for 2018/19. Westpac says that the Commonwealth Government’s net debt position remains extremely manageable. Net debt is forecast to rise from 10.0% of GDP in 2012/13 to 14.6% of GDP in 2016/17; it then narrows to 14.0% of GDP in 2017/18. In dollar terms, net debt rises from $153bn in 2012/13 to $261bn in 2016/17. Winners:
- Working women: paid parental leave of up to a maximum $50,000
- Small business: company tax to be cut by 1.5% to 28.5% for 800,000 SME’s.
- Medical research/Health: $20bn medical research future fund to be established.
- Infrastructure: package to stimulate the construction industry, primarily by building roads.
- Defence: Spending to be increased to 2% of GDP.
- Investment Banks & Legal firms: various privatisations should deliver substantial fees.
- Individuals exceeding non concessional super caps – have the option to withdraw excess contributions thus avoiding punitive tax.
- Young People under age 30, particularly if they are unemployed. The mantra is “earn or learn” as the Government seeks to make it difficult for younger people to go onto and stay on welfare. Most people will agree with this but it could be harsh for those with limited skills or other issues and who aren’t supported by the family. Also, the deregulation of university fees from January 2016 and the increases to HELP debt interest and repayment requirements will impact young people.
- Middle Income earners, in particular young families in their 30’s and 40’s. Family Tax B benefit will have its income threshold for the primary earner reduced from $150,000 to $100,000, effective from 1 July 2015, and stop when the youngest child turns 6 compared to the current age 18. Many of those with older children will continue supporting them living at home because of high rents and significant HELP debt. Raising of the pension age to age 70 from 1 July 2035 will also impact those born after 1 January 1966.
- Higher income earners – will pay a 2% levy from 1 July 2014 on income over $180,000 increasing the top marginal tax rate to 47% before the 2% Medicare levy.
- The sick – the new $7 co-payment and a $5 increase in Pharmaceutical Benefits Scheme prescriptions will impact on those needing to see the doctor regularly.
- The States – already the NSW Premier has highlighted the adverse impact of the substantial cut in Federal funding given to the States to support education and hospitals.
- Foreign Aid – to be cut substantially.
- Some self funded retirees – inclusion of untaxed superannuation income will mean that some new self funded retirees from January 2015 will no longer qualify for the Commonwealth Seniors Health Card.
Excess Non-Concessional Contribution Refunding For any excess contributions made after 1 July 2013 that are over the non-concessional contribution (NCC) cap, the Government will allow taxpayers to withdraw the excess NCCs and any associated earnings from their superannuation fund. Earnings withdrawn from the fund will be taxed at the taxpayer’s marginal tax rate. If the taxpayer chooses to leave the excess NCC in their fund, then they will be taxed on these contributions at the top marginal tax rate This removes the overly punitive outcomes of taxing excess NCCs at up to 93%. Commonwealth Seniors Health Card (CSHC) changes The Government is making a number of changes to the CSHC. These changes are:
- Indexing the current income limits for the CSHC by the CPI in line with its election commitment to do so.
- Including untaxed superannuation income in the eligibility assessment for the CSHC from 1 January 2015. The assessment of superannuation income will be the same for CSHC holders as for Age Pension recipients and will align with the 2013-14 Budget measure to deem the balances of account-based superannuation of pensioners from 1 January 2015. All superannuation account-based income streams held by CSHC holders before the 1 January 2015 will be grandfathered under the existing rules.
- The Government will achieve savings of $1.1 billion over five years from 2013-14 by ceasing the Seniors Supplement for holders of the CSHC from 20 September 2014.
This newsletter is not advice and provides information only. It does not take account of your individual objectives, financial situation or needs. You should consider talking to a financial adviser before making a financial decision.