2006 Personal Finance Budget Summary
The Big Picture Summary
There are two big themes from the 2006 budget - tax cuts and superannuation changes.
The tax cuts have been combined with changes to the low income tax offset and changes to family benefits to provide further benefit to low income earners and families.
The superannuation changes are headlined by the decision to remove the tax on superannuation withdrawals for people over 60 years of age, the abolishment of Reasonable Benefit Limits - RBL's - which limited the amount of concessionally taxed superannuation a person could accumulate, and the one broad limited of $50,000 for tax deductible contributions to superannuation in any one year, regardless of age.
Chris Richardson from Access Economics, speaking on ABC's Lateline program, described the budget as being a 'once in a century windfall' - so we may never have a better chance to use a budget to improve our personal financial situation.
The Tax Cuts - What do they Mean for You?
A person earning $20,000 will receive a tax cut of $365, a person earning $40,000 a year will receive a tax cut of $510 a year, a person earning $75,000 a year will receive a tax cut of $1,950 and a person earning $100,000 will receive a tax cut of $2,700. Every tax payer is going to end up with more money in their pockets from the 1st of July 2007. The question is what will people do with this? And what have people done with the previous tax cuts? We have now had a few years of tax cuts in a row, and we need to remind ourselves that tax cuts are not something that we will get every year - we need to make the most of this while it lasts.
So now that we have had a few years of tax cuts, the litmus test is how have we used them? Has the surplus cash flow, which we did not have prior to each tax cut been used to build wealth, or has it disappeared? From a personal finance perspective that is the first challenge - are you going to use the tax cuts to improve your financial position, either paying off debt of investing? With the tax cuts, only people earning more than $75,000 will pay tax at a rate above 30 cents in the dollar. This may change the effectiveness of negative gearing strategies for investors who have found that they have moved from one of the higher tax brackets to the 30 cent tax bracket. This reduced effectiveness happens because the tax benefit of the investment loss is reduced. For example, a person with a $2,000 tax loss on a rental property would receive a benefit of $940 based on a 47% tax rate, but a benefit of only $600 based on a 30% tax rate. Negative gearing is not as attractive for people on lower tax rates. If you find that you are moving to a lower tax bracket and this may reduce the effectiveness of your negative gearing strategy, prepaying your interest for the next financial may help maximise the value of your deduction. Margin loans, for example, often offer this facility.
Superannuation - It May Not be Super, but it is Starting to Look Very Good
There is a lot to dislike about superannuation. The rules keep changing, you can't touch it until you retire, it is a complex investment environment with a lot of rules....
All of which is true. There are a three other messages that you should also know:
1. While the rules do keep changing, the changes have been favourable for investors and made it a more attractive saving vehicle,
2. Superannuation is the most tax effective investment environment, now more than ever and,
3. The proposed new rules look genuinely simpler than those in existence now. Some of the proposed simplifications include:
* One standard contribution rule regardless of age
* No Reasonable Benefits Limits that has restricted the amount of concessionally taxed superannuation a person can accumulate
* Making (almost) all superannuation withdrawals tax free for people over the age of 60
* Having much simpler rules for withdrawing pensions (income stream payments) from superannuation
* Making the transfer of superannuation benefits between funds simpler and quicker (ie for consolidating superannuation accounts)
* More generous tax treatment of death benefits
* Allowing self employed people to make the Government Co contribution (if you are self employed and earn less than
$58,000 then this will be of interest), and to get a 100% tax deduction for contributions to superannuation
All of these changes cannot be outlined in a short brochure. The Government has set up a website at www.simplersuper.treasury.gov.au with further details. No doubt there will be plenty of information about this simplified superannuation system released over the next few months, and it seems to be a better time than ever to accept that superannuation is an important part of almost every wealth creation plan, and it will soon be easier to understand than ever.
There remains only one problem with superannuation, and that is that the 9% employer contributions are not going to be enough to fund most peoples retirement, and this needs to be kept in mind while we are building our financial plans.