SCOTT FRANCIS

15 MAY 2013

Summary: Pensioners choosing to downsize their home can now quarantine part of the proceeds from the assets means test, while some of the government’s previously announced super rule changes will come into effect from July 1 if passed. Increases in the Medicare levy make private health cover attractive when the 1.5% surcharge is taken into account. While tax changes for smokers could be beneficial for all taxpayers if the same model was adopted for bracket creep.

Key take-out: Those seniors that choose to sell their family home can have up to $200,000 exempt from the means test for 10 years so their access to the age pension is not impacted.

The latest federal budget, while hardly a dramatic document, does have implications for a number of issues related to personal finance.

These include a change in the rules for retirees downsizing their home, changes that might make people consider the value of private health insurance, a couple of rule changes with superannuation to take into account, and even a model for how income tax brackets should be adjusted in the future – but almost certainly won’t be.

House help for seniors

The ‘House Help for Seniors’ program is an interesting place to start in looking at budget changes. It allows people who have lived in their own house for 25 years to downsize and have $200,000 of the ‘profits’ able to be put into a special account that will not impact their age pension benefits for 10 years. Currently, a person’s home (principal place of residence) is exempt from the means tests (the two tests used to work out home much age pension a person will receive – the income test and the assets test). This means that people often hang onto larger residences, fearing that selling will reduce the amount of age pension that they receive. For a retiree, the option of selling and having more money available to fund retirement might be particularly attractive. And, while only up to $200,000 is exempt from the means test for 10 years, during that period other sources of funds (superannuation pensions, investments outside superannuation, cash reserves) might be drawn on more heavily – knowing that there is an extra $200,000 in ‘liquid’ assets.

Superannuation changes

Compulsory superannuation contributions begin to rise from July 1 this year – up to 9.25% from the current level of 9%. The following table sets out these rises over time. While it is nice to see these rises, it is also a reminder that for those of us well into the superannuation system that superannuation is not likely to be enough to fund our retirement. We have to plan to do some extra ‘work’ ourselves – whether it be through extra contributions to super or some investments outside of superannuation.

People planning their superannuation contributions for the 2013-2014 year need to keep in mind that they are now getting a slightly higher employer contribution, to ensure that they don’t go over their contribution limits.

Slightly higher contribution caps on tax deductible superannuation contributions (which include compulsory employer contributions and salary sacrifice contributions) are also planned. The cap is currently $25,000, but in April the government announced plans to lift this limit to $35,000 for people aged 60 and over from July 1 this year, and to $35,000 for people aged over 50 from next year. If passed, this will help people make higher superannuation contributions in the period leading up to their retirement, where increased superannuation contributions are a traditional focus.

In addition, the government has announced plans to introduce a 15% tax on superannuation funds in pension phase that earn income of more than $100,000. Currently funds paying a pension pay no tax on the fund income. If the proposed legislation is passed, this change could result in some people with higher balances considering superannuation splitting with a spouse, or building investment assets outside of superannuation.

Private health insurance

There were a couple of changes that might encourage people to keep paying for their private health insurance, even in the face of annual increases above the rate of inflation. The 0.5% increase in the current 1.5% Medicare Levy to fund the National Disability Insurance Scheme means that those people with incomes exposed to the full Medicare surcharge of 1.5% will potentially pay 3.5% in total.

The 3.5% rate is a significant extra ‘tax’ on earnings. By taking the 1.5% Medicare surcharge out of the equation, private health insurance will probably be an attractive option to many people.

Smokers showing the way

Smokers will have to pay 7 cents more (in tax) for a packet of cigarettes. This is not earth shattering by itself, however it is interesting to note how this is planned in the future, with tobacco excise now linked to rises in wages (through AWOTE – ‘Average Weekly Ordinary Time Earnings’).

By itself, it is not a huge announcement, however it does offer insight into what would be a fairer way to deal with income tax thresholds – moving them each year in line with the move in wages. This would get rid of ‘bracket creep’, which occurs when tax thresholds are not moved each year in line with inflation and wages, leading to a greater proportion of people’s income ‘creeping’ into higher tax brackets. This is good for governments, who then increase their take from income tax without doing anything, but bad for individuals, who face higher average tax rates as their income rises. Increasing tax thresholds by AWOTE each year would solve this – but I wouldn’t suggest holding your breath waiting for it to happen.

Conclusion

At first glance there might not seem to be too much for individuals to think about in the budget from a personal finance perspective.

However, the House Help for Seniors is an interesting program to think about in terms of retirement planning, and there are superannuation changes to keep on top of.

Private health insurance is likely to remain attractive for high income earners, and we can all hope that income tax thresholds might be linked to AWOTE in the future in the same way as the tobacco excise.