What does the Federal Budget mean for you?

You're probably over hearing about the budget. Well, just in case you've a little interest left in it, here are our take outs from last week's budget and what it means for you.

What does the Federal Budget mean for you?

When Joe Hockey stood in front of parliament and spoke about “fixing the Budget together”, he confirmed that the 2014 Federal Budget was going to be a tough one for many Australians.

Not surprisingly, most of the announcements related to spending cuts, as the Government seeks to return the Budget to surplus by 2018.

In particular, “the end of the age of entitlement” will see a reduction in welfare payments and concessions to many middle-income households. Also, high income earners will be asked to pay more tax over the next three years.

In terms of new spending, the two main commitments were to infrastructure and medical research, which will be funded by respective levies on petrol and doctor visits.

A major boost was also provided to businesses, with a reduction in the company tax rate from 1 July 2015.

What are the key changes that may affect you?

Income tax increase for high income earners

The top marginal tax rate for individual taxpayers will increase by 2% to 47% (or 49% including Medicare levy) for 3 years commencing 1 July 2014.

While 2% sounds like a lot, the levy only applies to taxable income over $180,000. So if you earn a taxable income of $200,000 a year you will pay an additional $400 a year, while taxpayers earning $300,000 will be an additional $2,400 out of pocket.  Any reduction in taxable income (through say higher tax deductions), will also reduce the amount you need to pay.

On the other hand, taxpayers with much lower incomes may potentially be hit by the levy if you sell an asset, such as an investment property, and make a capital gain that pushes your overall taxable income over $180,000 for the year.

If the proposed levy goes ahead, it makes it all the more important to seek professional advice before selling an asset over the next three years.

Changes to the Family Tax Benefit (FTB)

The following changes to the FTB will see family payments reduce in some cases:

·               The current indexation increases of the maximum and base rates of FTB Part A, and the rate of FTB Part B, will be paused until 1 July 2016.

·               From 1 July 2015, FTB Part B changes will include a reduction in the primary earner income limit from $150,000 to $100,000. It will also be limited to those families whose youngest child is younger than six years of age.

·               For FTB Part A, the large family supplement (currently $313.90 per child) will be limited to families with four or more children. This will be paid in respect of the fourth and each subsequent child in a family.

Increase of Superannuation Guarantee

The previous Labor Government planned to increase employer super guarantee (SG) contributions to 12% by 2019/2020. The current Government now proposes to lift the SG rate to 9.5% from 1 July 2014, then freeze it at that rate for four years, before increasing it by 0.5% a year until it reaches 12% at 1 July 2023.

For employees, these changes may allow you to effectively manage your contribution caps for the 2014/15 financial year. For employers, it gives you added certainty on the level of SG contributions you need to make from 1 July 2014.

Calculations by the Association of Superannuation Funds of Australia (ASFA) suggest that the current SG rate simply isn’t enough to provide most Australians with a comfortable retirement.2  So the announcement that the rate will continue to increase is good news for super savers.

But the new proposal also further delays the rate reaching the proposed 12% level. That will have a noticeable impact on many super investors, at a time when the proposed Age Pension age has increased the need to save more for the future.

Excess non-concessional contributions tax

Superannuation members will now be able to withdraw any non-concessional superannuation contributions (and related earnings) made after 1 July 2013 that breach the non-concessional contributions cap.

This proposal is good news as it will mean that clients who inadvertently exceed their non-concessional cap will have the ability to withdraw the excess amount rather than have it taxed at the top marginal rate. It also ensures the treatment of excess non-concessional contributions will be broadly consistent with the rules that apply to excess concessional contributions.

Increase of Age Pension Qualifying Age

The Age Pension qualifying age will continue to rise by six months every two years from the qualifying age of 67 (from 1 July 2023), gradually reaching a qualifying age of 70 years by 1 July 2035.

Individuals born before July 1958, or those in receipt of a DVA Service Pension, will not be impacted by these changes.

While the policy reasons for this change are understandable, the reality is that many people will find it hard to continue working until 70. So, it’s likely there will be a gap between the time many people retire and the time they qualify for the Age Pension.

How much super might you need to fund that gap? If you’re 48 years old, born in January 1966, and you want to retire at 65, you will need around $96,432 in super to earn the equivalent of the maximum Age Pension (currently $21,912 a year for singles) during the five-year gap. If you’re in a couple, you’ll need around $72,689 each in super to earn the equivalent of the maximum Age Pension (currently $32,416.80 a year for couples).

That’s a lot to save over the next 16-and-a-half years. To close this gap, a 48 year old single person will need to put around $5,232 a year extra into super, while each member of a couple will need to contribute $3,943 more each year.1

Changes to the Commonwealth Seniors Health Card (CSHC)

The Government has announced a number of changes to the CSHC. This card allows self-funded retirees to gain access to medicines listed on the Pharmaceuticals Benefits Scheme (PBS) at a concessional rate as well as other concessions.

To be eligible, a person must have an adjusted taxable income (ATI) of:

·         $50,000 (singles)

·         $80,000 (couples, combined) or

·         $100,000 (couples, combined for couples separated by illness or respite care)

The proposed changes include:

·         Annual indexation of the income thresholds to CPI from September 2014

·               Account based pensions (ABP) that are subject to deeming will be included in the CSHC income test from 1 January 2015. Grandfathering applies to holders of a CSHC on 1 January 2015 with an ABP commenced prior to that date.

·               Holders of the CSHC will cease to receive the Seniors Supplement beyond the June 2014 quarter.

The inclusion of deemed income on Account Based Pensions in the assessment of income to determine eligibility to the CSHC will have a significant impact on a number of self-funded retirees.

Under the proposed change, based on the current deeming rates and thresholds and assuming no other income, a new applicant will not qualify for a CSHC if their ABP exceeds $1,448,543 (singles) or $2,318,886 (couple, combined).

However, these changes will not only impact self-funded retirees with large ABP balances, but also those with lower ABP balances who have other Adjusted Taxable Income such as income from untaxed Government schemes or foreign pensions.  Further, the grandfathering provision essentially "locks" you in to your existing ABP provider, as any change after 1 January 2015 will see a new ABP deemed for CSHC purposes.

If you are concerned about the impact of this change on your access to the CSHC or the flexibility of your ABP, please contact us.

Reduction in the company tax rate

The Government has re-instated its commitment to cutting the company tax rate by 1.5% from 1 July 2015, from 30% to 28.5%.

For large companies, the reduction will offset the cost of the Government’s Paid Parental Leave levy. As a result, shareholders may receive the same level of dividends but less franking credits (assuming the levy is not franked), leaving you worse off. For smaller companies it will help improve cash flow and profitability.

Reminder: Increase in the Medicare Levy from 01 July 2014

As per the 2013 Budget, the Medicare Levy will increase from 1.5% to 2.0% from 1 July 2014 to provide funding for DisabilityCare Australia. This measure has already been legislated.

Low income earners will continue to receive relief from the Medicare Levy through the low income thresholds for singles, families, seniors and pensioners.

The current exemptions from the Medicare Levy will also remain in place, including for blind pensioners and sickness allowance recipients.

What happens next?

Most of these changes are only at the proposal stage, and they will need to be legislated before they come into effect. However, it’s always a good idea to be aware of what changes may be coming and what they might mean for you.

If you have any questions or concerns about how these or any other proposals could impact you and your family, give us a call on 02 9455 0655.



1 Assumptions: Figures-are shown in today’s dollars; rate of inflation of 3% pa;. Centrelink rates for the period between 20 March 2014 and 30 June 2014; pensions are indexed at 3.0% pa.; an account based pension is to be commenced at age 65 with rate of return of 7% pa.; contributions tax of 15%; rate of return on investment in accumulation phase is 6.0% pa net of taxes and fees and Super contributions will increase by 3.5% pa.

2 ASFA Retirement Standard, March 2014.


This information is issued by Naomi Rosenthal of Tudor Investassure Pty Ltd and is a summary of Professional Wealth Services Pty Ltd's (PWS) understanding of the proposed Federal Budget 2014/15 changes announced on 13 May 2014. The changes are subject to the passing of legislation and, accordingly, may not become law or may change. Please note that the information is based on PWS's interpretation of the proposed changes as at the date of issue of this document. Accordingly, you must not do or refrain from doing anything in reliance on this information without obtaining suitable professional advice.

In addition, the information is of a general nature and may not be relevant to your individual circumstances. Before making any investment decision you must consider the relevant PDS. PDSs are available on request by contacting us on 02 9455 0655.