On Tuesday 8 May 2018, the Treasurer, Scott Morrison, released the Government’s 2018-19 Federal Budget. The Budget is designed to create short sharp election headlines.
This year’s Budget has an emphasis on retirement planning and contains several important considerations which may affect both retirees and pre-retirees, explored further below.
It’s important to note that at this point in time, these proposed measures are not yet law and may be subject to change.
We will of course review the changes to your particular circumstances at our Annual Planning Meeting.
Personal income tax bracket thresholds
Over a seven year period the Government has proposed changes to the personal income tax thresholds and to phase-out the 37% tax rate, described in the following table:
Two per cent Medicare Levy retained
The Government will retain the Medicare Levy rate at 2.0% and will not proceed with the proposed increase to 2.5% of taxable income from 1 July 2019.
Low and Middle Income Tax Offset
A new non-refundable Low and Middle Income Tax Offset (LMITO) will be introduced. The LMITO will be a temporary measure applying from July 2018-19 until 2021-22 (starting at $200 up to $37,000).
The maximum annual offset will be $530 and will cut out for those with a taxable income above $125,333 per annum.
Low Income Tax Offset
From 1 July 2022 the annual Low Income Tax Offset (LITO) will increase to $645 and will cut out for those with a taxable income above $66,667 per annum.
Increase to Medicare Levy low-income thresholds
The Medicare Levy low-income threshold will be increased as follows:
Extending the $20,000 instant asset write off until 30/6/2019
For a further 12 months until 30 June 2019, small businesses with aggregated annual turnover of less than $10 million may continue to immediately deduct purchases of eligible assets costing less than $20,000 first used or installed ready for use by 30 June 2019.
Assets valued at $20,000 or more (which cannot be immediately deducted) can continue to be placed into the small business simplified depreciation pool (the pool) and depreciated at 15 per cent in the first income year and 30 per cent each income year thereafter.
Superannuation work test exemption
From 1 July 2019 the Government will introduce an exemption from the work test for voluntary contributions to superannuation. This is available for retirees aged 65 to 74 with superannuation balances below $300,000 in the first financial year that they do not meet the work test.
The exemption will be available for 12 months from the end of the financial year in which they last met the work test.
The work test currently requires individuals who are 65-74 to have worked at least 40 hours within 30 consecutive days in a financial year before they can make a personal contribution to superannuation.
Preferable treatment for small account balances under $6,000
From 1 July 2019:
No exit fees
Maximum ongoing fee $180 p.a.
No automatic insurance
Increasing the maximum number of members in self-managed superannuation funds
From 1 July 2019, the maximum number of members allowable in a new or existing self-managed superannuation fund (SMSF) or small APRA fund will increase from four to six.
Retirement income framework
The Government will require superannuation trustees to develop and offer members retirement income products that provide them with income for life, no matter how long they live.
The Government will consult with industry to confirm the approach and commencement date.
Preventing inadvertent concessional cap breaches
From 1 July 2018, the Government will allow individuals with multiple employers and whose income exceeds $263,157 to nominate that their wages from certain employers are not subject to the compulsory Superannuation Guarantee (SG) contributions. The employee could negotiate to receive additional income instead of the SG contributions from their employer.
Three-yearly audit cycle for some SMSFs
SMSFs currently require an annual audit. To reduce red tape for SMSFs with a history of good record keeping and compliance, the Government will change this to a three-yearly audit requirement.
This measure will start on 1 July 2019 and eligible SMSFs will be those where the trustees have a history of three consecutive years of clear audit reports and have lodged the fund’s annual returns in a timely manner.
Means test rules for lifetime income streams
From 1 July 2019, the Government has announced new social security means test rules for lifetime retirement income stream products purchased on or after that date.
Under the proposed rules:
60% of the purchase price of a lifetime income stream is assessed as an asset until age 84, or a minimum of five years, thereafter 30% is assessed as an asset for the rest of a person’s life; and
A fixed 60% of all lifetime income stream payments will be assessed as income.
Grandfathering will apply for retirees who purchased a lifetime retirement income stream before 1 July 2019, meaning they will continue to be subject to the current rules.
Additionally, retirees with a term and/or account-based income streams are unaffected by this measure.
Watch this space in relation to the development of new income products.
Social Security / Centrelink
Pension Work Bonus
From 1 July 2019, the Pension Work Bonus will increase from $250 to $300 per fortnight with the maximum unused amount that can be accrued increasing to $7,800 (up from $6,500).
In addition, the Government will extend the Pension Work Bonus to those who are self-employed. However, a ‘personal exertion’ test will be introduced to ensure the Pension Work Bonus is only available to those who are engaged in gainful work and not to those receiving passive income such as income from real estate.
Expanding the Pension Loan Scheme
From 1 July 2019, the Government will expand eligibility to the Pension Loan Scheme to include all Australians of Age Pension age. Under this measure eligible individuals can obtain a loan (secured against the individual’s property) in order to receive a regular fortnightly pension payment of up to 150% of the maximum pension rate. Eligible pensioners who take up this option are able to repay the loan at any time or on the sale of the property and a fortnightly compounding interest rate of 5.25% currently applies.
Introduce an Income Test for Carer Allowance
From 20 September 2018 the Government will introduce a $250,000 annual Income Test threshold for the Carer Allowance (currently $127.10 per fortnight & Carer’s supplement of $600 p.a.) and Carer Allowance (Child) Health Care Card – previously not means tested (for income and assets).
Providing better access to aged care
The Government will provide an additional 14,000 new high level home care packages over four years from 2018-19 in addition to the 6,000 high level packages previously proposed in the 2017/18 Mid-Year Economic and Fiscal Outlook.
The additional home care packages will be complemented by the release of a further 13,500 residential aged care places and 775 short term restorative care places.
Please note that any advice contained in this alert is to be regarded as general investment advice and factual of nature rather than personal advice. As it is not possible to take into account each client's individual circumstances, before acting on the recommendations contain in this report clients must determine the appropriateness of a particular recommendation in the light of their investment objectives and financial situation.