While the Treasurer didn’t mention superannuation, there are a couple of important proposals for members close to retirement.

On Tuesday 2 April, Treasurer Josh Frydenberg handed down the 2019-20 Federal Budget, opening with tax breaks that build on the cuts announced last year. Education, health, infrastructure and aged care also headlined in a budget that delivers a surplus just above $7 billion.

As with all Budgets, these are announcements only and have not been legislated. The details are still to be worked through, and both Houses of Parliament need to pass legislation before the announcements take effect. Parliament won’t consider these announcements until after the Federal election, expected in May this year.

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1. Superannuation changes for those nearing retirement

From 1 July 2020, if you are 65 or 66 years old, you will be able to make voluntary superannuation contributions — both concessional and non-concessional — without meeting the work test.

Currently, if you are aged from 65 to 74, you must work a minimum of 40 hours over a 30-day period to meet the work test to be eligible to make voluntary contributions in the same financial year.

If you are 65 or 66, you will also be able to take advantage of the bring-forward arrangements which allow you to make three years’ worth of non-concessional contributions, capped at $100,000 a year, in a single year. Currently, only members under 65 can use this arrangement.

Remember to make sure you don’t exceed your
Total Superannuation Balance caps.

The current rules for making contributions to your spouse’s super will also be extended for older members. Currently, your spouse can only receive contributions from you if they are aged 69 years and younger. From 1 July 2020, the spouse receiving the contributions can be 74 and younger.

The existing income and contribution thresholds regarding spouse contributions remain the same.

Case study: work test

In December 2020, John and Jane will both be aged 66 and fully retired for two years. They have owned an investment property for many years and decide to sell it for $700,000. By waiting until they are retired, John and Jane have minimised their significant capital gain, leaving them more money to invest for their future.

Under the current pre-1 July 2020 work test rules, neither would be eligible to contribute to super. However, the proposed new rules don’t require a work test until age 67, so both John and Jane could use some of the proceeds to make contributions to their super.

The most tax-effective contribution type would depend on their overall circumstances but could include the following.

  • Concessional contributions up to $25,000 each, to offset high taxable capital gains on the sale of the investment property.
  • Non-concessional contributions up to $300,000 each (depending on their current super balances).
  • A spouse contribution of $3,000 to each other (as part of the non-concessional contribution), providing both with a potential tax offset of up to $540. 

2. Changes to income tax

The Government has proposed to provide about 10 million Australians with tax relief by bringing forward and changing its seven-year tax plan from last year’s Budget.

The proposals include:

  • increasing the temporary non-refundable Low and Middle Income Tax Offset (LMITO) of up to $1,080 per year for people earning less than $126,000 in 2018-19. The LMITO will be received after individuals’ tax returns have been assessed for the 2018-19 and later years, 
  • stopping the LIMTO from 1 July 2022 but increasing the Low Income Tax Offset to $700,
  • increasing the threshold of the 19% tax bracket from $41,000 to $45,000 from 1 July 2022, and
  • reducing the 32.5% marginal tax rate to 30% from 1 July 2024, the same time as the planned removal of the entire 37% tax bracket.

Age pensioners and other pension recipients could benefit from a one-off energy bill payment of $75 for singles and $125 for couples.

Full details of these proposals are available from the Budget website.

Case study: super or mortgage?

Jill is a 53-year old school teacher and earns $80,000 plus 9.5% superannuation. At this salary level, Jill receives the full Low and Middle Income Tax Offset, meaning $1,080 in extra take-home pay in the financial year 2018-19. So what can Jill do with this extra $1,080? She has a few options:

1. Spend it on something she’s always wanted, like a holiday
2. Pay $1,080 extra off the mortgage, which can then compound over time.
3. Contribute more to super. If Jill is not already using up her $25,000 concessional contribution (before-tax) cap, she could make a concessional contribution to super of $1,649. As Jill can claim a tax deduction for this type of super contribution, her take-home pay is reduced by $1,080 (the amount of the Low and Middle Income Tax Offset) due to the income tax saving. Jill will be taxed 15% on the $1,649 as it goes into super, which means she adds $1,402 to her super balance, which can then compound over time. 

What these options could look like over the next 15 years

Assuming Jill exercises one of these options every year, over the next 15 years, this is what her benefits are estimated to be: 

  Option 1:
Spend it
Option 2:
Reduce mortgage
Option 3:
Contribute to super
After 1 year – age 54
$0 $1,080 $1,402
After 5 years – age 58 $0 $5,958 $7,903
After 15 years – age 68 $0 $23,305 $32,633

Assumes mortgage interest rate of 5.0% and return on superannuation of 6.0% (after fees and earnings tax).

3. Education

The Government announced a total of $292 billion for all public, independent and Catholic schools’ recurrent funding from 2019 to 2029.

This will see funding for schools grow from $19.9 billion in 2019 to $32.4 billion in 2029. Under the National School Reform Agreement, the Government will work with the states and territories to implement national reforms to improve student outcomes and excellence in classrooms.

The Government will also provide $30.2 million in 2019 20 to schools under the Local School Community Fund to help local communities fund school activities and new equipment.

Universal access to pre-school

The Budget has committed $453 million to extend the National Partnership Agreement on Universal Access to Early Childhood Education until the end of 2020. This will ensure every child has access to a pre-school education for 15 hours a week in the year before school.

Investing in universities

The Government announced plans to invest $17.7 billion in the university sector in 2019, projected to grow to more than $20 billion by 2024. In this Budget, the Government allocated $93.7 million over four years from 2019 20 for scholarships for students to study at a regional campus of a university or vocational education training provider.

The Government also reiterated its funding of the Science in Australia Gender Equity initiative to women's participation in science, technology, engineering and maths (STEM).

4. Health

The Government’s theme, ‘Investing in the health of Australians’, will see an increase in spending from $81.8 billion in 2019-20 to $89.5 billion in 2022-23. The announcement of $1.3 billion for the Community Health and Hospitals Program includes a Comprehensive Children’s Cancer Centre in Sydney and a Centre of Excellence in Cellular Immunotherapy in Victoria.

The Treasurer also announced:

  • adding new services to the Medicare Benefits Schedule, including diagnostic imaging for breast cancer and heart health checks,
  • establishing a Heart Kids Project for new research to treat and prevent heart disease,
  • investing in new MRI licences, including at Mount Druitt Hospital in New South Wales, Ipswich Hospital in Queensland and Kalgoorlie Health Campus in Western Australia, and 
  • significant funding for youth mental health and suicide prevention strategy. 

The Government also reiterated its funding of the National Plan to Reduce Violence against Women and their Children which includes strategies for the prevention of financial abuse.

5. Aged care

The Government announced $21.6 billion in 2019-20 to strengthen aged care services with a focus on safety and quality. This includes:

  • an additional 10,000 home care packages for older Australians who want to remain in their homes and need support,
  • a $320 million general subsidy for people in residential care and $8.4 million to introduce mandatory reporting on quality of services, 
  • a National Plan to Respond to the Abuse of Older Australians including a national hotline, trials of frontline services for victims of abuse and developing a Serious Incident Response Scheme, and 
  • $185 million over 10 years to fund research into dementia, fall prevention and assistive technologies to support independence.

6. Infrastructure, climate and regions

The Government has announced transport infrastructure investment of $100 billion over the next decade. Key proposals include:

  • fast rail between Melbourne and Geelong,
  • assessments of five other potential fast rail routes (Sydney to Wollongong, Sydney to Parkes (via Bathurst and Orange), Melbourne to Albury Wodonga, Melbourne to Traralgon, and Brisbane to the Gold Coast) to complement the three already underway (Sydney to Newcastle, Melbourne to Greater Shepparton, and Brisbane to the Sunshine Coast), 
  • an Urban Congestion Fund of $4 billion to target congestion, including $500 million for park and ride facilities at train stations, and
  • a Road Safety Package which will help local councils with road maintenance. 

Super funds could potentially invest in these projects and hold them as assets for members.

As announced in February 2019, the Government is investing $3.5 billion in a Climate Solutions package that aims to meet emissions reduction targets and lower energy prices. The package builds on existing policies, expands Snowy 2.0, focuses on helping households and businesses to improve energy efficiency, and includes plans to develop a national electric vehicle strategy.

Regions

The Government is allocating further funding for a fourth round of the Building Better Regions Fund.

This will include improved internet and mobile services through the Stronger Regional Connectivity Package, and regional airport infrastructure upgrades to improve airport safety and access. The government is also investing $543 million in tourism throughout regional Australia.

The Government is rolling out a number of regional deals to support areas such as the Albury-Wodonga region on the NSW and Victorian border.

A total of $6.3 billion is being provided for drought assistance and concessional loans for farmers and farming communities.

7. Greater industry regulation

The Budget also announced a number of initiatives in response to the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. These included additional funding for regulators, a compensation scheme of last resort, greater funding for the Australian Financial Complaints Authority to consider eligible financial complaints dating back to January 2008, and investigating the establishment of a Superannuation Consumer Advocate.

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If you have questions about how these changes might affect you, contact us for an appointment with a super adviser or a financial planner.