Watch the video below to learn about the latest economic updates and market movements.
Please get in touch if you’d like assistance with your personal financial situation.
Patrick Flynn · ·
Watch the video below to learn about the latest economic updates and market movements.
Please get in touch if you’d like assistance with your personal financial situation.
Patrick Flynn · ·
Last night the Federal Government handed down its Budget for the 2021-22 financial year and what a budget! Seldom has there been a budget that provides the opportunity for superannuation planning like this one. Too bad we will have to wait until the 2022-2023 year for the exciting stuff but at least we know it’s most likely coming.
Some of the key Budget announcements that may be of particular interest to you include:
The work test, that currently has the requirement for an individual to work for 40 hours in 30 consecutive days to be able to contribute to super, will be abolished. This means that anyone under the age of 75 will be able to make personal concessional and non-concessional contributions irrespective of their employment situation. That’s great news for our valued clients who are over age 65, who have been restricted in being able to contribute to Superannuation.
The non-concessional bring forward provisions, currently available up to age 65, will be extended to the under 75s as well – subject to the usual caps of course.
Downsizer contribution age eligibility will be reduced from those over 65 to those over 60. The Downsizer contribution allows an after-tax contribution of up to $300,000 per person when they sell their family home.
A 68-year-old individual who has missed the super boat and is largely invested personally will have the opportunity to make concessional (Personal) contributions, immediately available as unrestricted non-preserved monies, to wipe out personal tax. Selling investment assets and moving the proceeds into superannuation may now be an option with the availability of unused concessional contributions to offset capital gains tax and the availability of the Non-Concessional Contribution bring forward provisions.
The budget has been favourable to people over the age of 65, who want to contribute more money into the Superannuation system, however, we must wait for the actual legislation to be passed and receive Royal Assent. It is, therefore, expected that these measures will not be operational until they are passed by Parliament and become law and most likely not effective until 1 July 2022. We will Keep our fingers crossed.
Here is a summary of all the proposals:
The Government has announced it will allow individuals aged 67 to 74 to make or receive non-concessional (including under the bring-forward rule) or salary sacrifice superannuation contributions without meeting the work test, subject to existing contribution caps.
However, individuals aged 67 to 74 years wanting to make personal deductible contributions will still have to meet the existing work test.
This measure is proposed to have effect from the start of the first financial year after the enabling legislation receives Royal Assent. The Government stated it expects this to occur prior to 1 July 2022.
The Government has announced it intends to reduce the eligibility age to make a downsizer contribution from 65 to 60 years of age.
The downsizer contribution rules allow people to make a one-off after-tax contribution to super of up to $300,000 from the proceeds of selling their home they have held for at least 10 years. Under the rules, both members of a couple can make downsizer contributions for the same home and the contributions do not count towards a member’s non-concessional contribution cap.
This measure is proposed to have effect from the start of the first financial year after the enabling legislation receives Royal Assent. The Government has stated that it expects this to occur prior to 1 July 2022.
Removing the work test for people aged 67-74 to make non-concessional contributions will provide more flexibility for retirees under 75 to top up their super without needing to work 40 hours within 30 consecutive days in a year prior to making a contribution. It will also allow advisers to implement strategies, such as the re-contribution strategy, that are not normally available to retired clients in this age group.
The removal of the work test to allow salary sacrifice contributions to be made on behalf of people in this age group also means funds will be able to automatically accept these contributions without needing to first confirm the member has satisfied the work test. It also means that members in this age group can have salary sacrifice contributions made on their behalf in the first week of a financial year.
In its announcement, the Government confirmed that people aged 67-74 making non- concessional contributions will still be subject to existing contribution caps.
Therefore, a client who was under age 67 at the start of the year and has since turned 67 will be able to make a non-concessional contribution of up to $110,000 without first needing to satisfy the work test (or up to $330,000 under a proposal to extend the bring-forward rule to people under age 67 that is yet to be legislated).
The Government has announced it will increase the maximum releasable amount for the First Home Super Saver Scheme (FHSSS) from $30,000 to $50,000.
Under the existing FHSSS rules, an eligible person can only apply to have up to $30,000 of their eligible (voluntary) contributions, plus a deemed earnings amount, released from super to purchase their first home.
This measure is proposed to have effect from the start of the first financial year after the enabling legislation receives Royal Assent. The Government has stated that it expects this to occur prior to 1 July 2022.
Reducing the eligibility age for downsizer contributions to age 60 could allow an eligible couple in their early sixties to sell their home and contribute up to $1.26m to super in a year by each making a $300,000 downsizer contribution and $330,000 non-concessional contribution.
Alternatively, where a client wants to contribute a much smaller amount, it will be important for an adviser to consider what type of contribution they should make in order to maximise their ability to make contributions in future.
For example, if a client in their early sixties has $300,000 from the sale of a home they want to contribute to super, they may be better off making a $300,000 non-concessional contribution under the bring-forward rule rather than a downsizer contribution, as this would then preserve their ability to make a downsizer contribution in future.
The Government has announced it intends to remove the $450 per month minimum superannuation guarantee (SG) income threshold.
Under the current rules, an employer is not required to pay superannuation guarantee contributions for an employee who earns less than $450 per month.
This measure is proposed to have effect from the start of the first financial year after the enabling legislation receives Royal Assent. The Government has stated that it expects this to occur prior to 1 July 2022.
Explained
Considering that two out of every three part-time workers are female, the SG threshold disproportionately impacts women who do a small amount of paid work, or who work multiple jobs each paying less than $450 per month. Younger workers combining part-time employment with full-time university study are also in the same situation.
Abolishing the $450 per month threshold could therefore help younger workers over age 18 to start accumulating superannuation earlier as well as help address the gap in super savings between women and men.
For example, abolishing the threshold could give a female worker at age 30 who drops down to one part-time employment arrangement due to family caring responsibilities up to an extra $6,924 in super at age 40. This difference will then continue to grow over time due to compounding investment returns, increasing to $11,700 in today’s dollars by retirement at age 67*.
*Assumptions: Results are in today’s dollars and calculated using ASIC Moneysmart superannuation calculator with the default assumptions applied. Assumes a 30-year-old with a super balance of $50,000 drops down to part-time employment earning $449 per month for 10 years. Assumed age of retirement is 67 years of age.
The Government has announced people with certain complying income stream products will be given a two-year window to commute and transfer the capital supporting their income stream (including any reserves) back into a superannuation account in the accumulation phase. The member can then decide whether to commence a new account-based pension, take a lump sum benefit or retain the balance in the accumulation account.
The income streams affected by this measure include:
Under the measure, any commuted reserves will not be counted towards an individual’s concessional contributions cap but they will be taxed as an assessable contribution of the fund.
When commuted, any social security treatment the product carries such as 100% or 50% asset test exemption and/or grandfathering for income test purposes will cease.
However, the Government has confirmed there will be no re-assessment of the social security treatment the product received prior to the commutation. Therefore, the member would not be required to pay back any overpaid entitlements.
The Government has also confirmed the existing transfer balance cap rules will continue to apply. Therefore, on commutation, the member will receive a debit in their transfer balance account based on the debit value method that applies.
Income streams not included in this measure include flexi-pensions offered by any provider and lifetime products offered by a large APRA-regulated defined benefit scheme (eg some older corporate funds) or public sector defined benefit scheme (eg CSS, PSS).
The Fact Sheet ‘Superannuation – More Flexibility for Older Australians’ states the products covered as those that first commenced prior to 20 September 2007. This appears to include those products that have since been commuted and rolled over to commence a new complying product.
How the value of the reserves of life expectancy or lifetime products will be calculated for the purposes of determining the assessable contribution to the fund remains to be seen and will be an important consideration for larger balances.
It will be important for members to consider the effect of commutations and commencement of new income streams on their transfer balance account. Often the debit on the commutation of a complying income stream is well below the actual capital that is released. Members and trustees will need advice in this complex area.
This is particularly good news for trustees of SMSFs that hold these products where balances have been depleted to the point of making the expenses to administer the fund unviable.
The Government plans to relax the residency requirements for SMSFs by extending the central management and control test from 2 to 5 years and removing the active member test.
Under current rules, SMSF trustees living overseas who intend to return to Australia at some point can be away for a period of up to two years and the fund will still meet the central management and control test. Under the proposal, the trustee will be able to be away for up to five years and still meet the test.
Further, the active member test will be abolished. Under this test, if the fund had members that were ‘active’ by making contributions or rollovers into the fund, the residency status of the fund could be jeopardised. This means that members who are overseas for a period of time often cannot make contributions to their SMSF or SAF. In contrast, a non-resident can contribute to large APRA and industry funds without putting the fund’s residency status at risk.
Abolishing the active member test simplifies the rules and ensures that members and trustees who are temporarily overseas can continue to make contributions to their SMSF or SAF without jeopardising the fund’s complying status.
Under the central management and control test, SMSFs trustees must only intend to move overseas on a temporary basis. If the trustees move away permanently with no intent to return, the current 2 year period (and the proposed 5 year period) will not apply and the SMSF will become a non-resident (and hence non-complying) fund immediately.
In the 2018 Women’s Economic Security Statement the Minister for Women, the Hon Kelly O’Dwyer MP, announced that the Government planned to extend the ability to access early release of superannuation to victims of family and domestic violence.
The Government confirms that this proposal will not be proceeding.
Patrick Flynn · ·
Just as we were recovering from the long drought and the worst bushfires on record, the global coronavirus pandemic took hold and changed everything.
Suddenly, simple things we took for granted, like going to the office or celebrating special occasions, were put on hold. While life is still not back to normal, Australia is in better shape financially than many people expected at the height of the economic shutdown.
Take superannuation. Far from being a wipe-out, the average superannuation growth fund is on track to finish 2020 with a positive return of 3 per cent.i But it’s been a wild ride along the way.
Australian Key Indices December 2020 | Share Markets (% change) Jan – Dec 2020 | ||
Economic growth* | -3.8% | Australia All Ordinaries | -1.45% |
RBA cash rate | 0.1% | US S&P 500 | 16.37% |
Inflation | 0.7% | Euro Stoxx 50 | -5.14% |
Unemployment | 6.8% | Shanghai Composite | 13.87% |
Consumer confidence | 112.00 | Japan Nikkei 225 | 16.01% |
* Year to September 30, 2020 Sources: RBA, Westpac Melbourne Institute, Trading Economics as at December 31
Globally, the US presidential election and Joe Biden’s victory removed a major element of uncertainty overhanging global markets. As did the UK finally signing a post-Brexit agreement on trade and other matters with the European Union just before Christmas. However, trade tensions with China remain an ongoing concern.
The pandemic dragged an already sluggish global economy into recession, and we were not immune. In Australia, drought, bushfires, storms and the health crisis took their toll as we entered recession in for the first time in 28 years.
The economy contracted 7 per cent in the June quarter alone, the biggest fall since World War II, before rebounding in the September quarter. Even so, in the year to September our economy contracted 3.8 per cent.ii
Final figures for 2020 are not in yet but an annual fall of 2.8 per cent is forecast, putting us in a better position than most developed nations.iii This is due in part to Australia’s relative success at containing COVID-19, and massive financial support from Federal and State Governments and the Reserve Bank.
After starting the year at 0.75 per cent, the official cash rate finished the year at an historic low of 0.1 per cent. The Reserve Bank has indicated it will keep the cash rate and 3-year government bond rate at this level for three years to encourage businesses to invest and individuals to spend.iv
It seems to be working. Consumer confidence bounced back to a decade high of 112 points in early December as Australia eased restrictions.v Business confidence also hit an almost three-year high in November, but unemployment remains at 6.8 per cent after peaking at 7.5 per cent.vi,vii
While low interest rates make life difficult for retirees and others who depend on income from bank deposits, they gave share and property markets a boost in 2020 as investors looked for higher returns than cash.
In February/March when the scale of the health and economic crisis became evident, sharemarkets plunged around 35 per cent. As borders and businesses closed and commodity prices collapsed, investors rushed for safe-haven investments such as bonds and gold.
But it soon became apparent that there were economic winners as well as losers, with global technology and health stocks the main beneficiaries.
By the end of 2020, US shares were up 16 per cent, with the tech-heavy Nasdaq index up 48 per cent.viii
Closer to home, Australian All Ordinaries index was up 0.7 per cent, or 3.6 per cent when dividends are included. Some of the best performers were small tech stocks, which helps explain why the ASX200, which is top heavy with banks, resources and property trusts, fell 1.5 per cent.
Elsewhere, European markets were mostly lower reflecting their poor handling of the pandemic. While China and Japan performed strongly, up 14 per cent and 16 per cent respectively.
China’s economic rebound was another factor in the Australian market’s favour, with iron ore prices jumping 70 per cent.ix
Rising iron ore prices and a weaker US dollar pushed the Aussie dollar up 10 per cent to close the year at US77c.x
Gold prices hit a record high in August against a backdrop of ballooning government debt worldwide, but prices eased as sharemarkets surged, finishing 25 per cent higher at US$1,898.ix
At the other end of the scale, oil was one of the biggest losers as economic activity and transport ground to a halt. Oil prices fell more than 20 per cent despite OPEC producers restricting supply.ix
Despite dire predictions of a property market collapse earlier in the year, residential property values rose 3 per cent in 2020 and 6.6 per cent when rental income is included.xi
Melbourne was the only city to record a price fall (down 1.3 per cent), with combined capital cities up 2 per cent.
The real action though was in regional areas where average prices lifted 6.9 per cent. While regional markets lagged over the past decade, 2020 saw more Australians embrace working from home and the possibility of living outside crowded cities.
As 2021 gets underway, Australia is inching back to a new normal on growing optimism about the global rollout of vaccines to contain the spread of the coronavirus and allow more movement of people and goods.
Our economy is forecast to grow by 5 per cent this year, but there are bound to be bumps along the way, with the potential for new waves of the virus and ongoing trade tensions with China.xii
In the meantime, the Federal Government and Reserve Bank stand ready to continue stimulus measures to support jobs and the economy.
After the year that was, a return to something close to normal can’t come quick enough.
i https://www.chantwest.com.au/resources/november-surge-drives-funds-into-black-for-2020
ii https://tradingeconomics.com/australia/indicators
iii https://www.commsec.com.au/content/dam/EN/ResearchNews/2021Reports/January
vi https://business.nab.com.au/monthly-business-survey-november-2020-43972/
viii https://tradingeconomics.com/stocks
ix https://tradingeconomics.com/commodties
x https://tradingeconomics.com/currencies
xii https://tradingeconomics.com/australia/gdp-growth-annual
Patrick Flynn · ·
In what has been billed as one of the most important budgets since the Great Depression, and the first since the onset of the COVID-19 pandemic dragged Australia into its first recession in almost 30 years, Treasurer Josh Frydenberg said the next phase of the journey is to secure Australia’s future.
As expected, the focus is on job creation, tax cuts and targeted spending to get the economy over the COVID-19 hump.
The Treasurer said this Budget, which was delayed six months due to the pandemic, is “all about helping those who are out of a job get into a job and helping those who are in work, stay in work”.
After coming within a whisker of balancing the budget at the end of 2019, the Treasurer revealed the budget deficit is now projected to blow out to $213.7 billion this financial year, or 11 per cent of GDP, the biggest deficit in 75 years.
With official interest rates at a record low of 0.25 per cent, the Reserve Bank has little firepower left to stimulate the economy. That puts the onus on Government spending to get the economy moving, fortunately at extremely favourable borrowing rates. And that is just as well, because debt and deficit will be with us well into the decade.
The Government forecasts the deficit will fall to $66.9 billion by 2023-24. Net debt is expected to hit $703 billion this financial year, or 36 per cent of GDP, dwarfing the $85.3 billion debt last financial year. Debt is expected to peak at $966 billion, or 44 per cent of GDP, by June 2024.
The figures are eye-watering, but the Government is determined to do what it takes to keep Australians in jobs and grow our way out of recession.
So, what does the Budget mean for you, your family and your community?
With young people bearing the brunt of COVID-related job losses, the Government is pulling out all stops to get young people into jobs. Youth unemployment currently stands at 14.3 per cent, more than twice the overall jobless rate of 6.8 per cent.
As we transition away from the JobKeeper and JobSeeker subsidies, the Government announced more than $6 billion in new spending which it estimates will help create 450,000 jobs for young people.
“Having a job means more than earning an income,” Mr Frydenberg said.
Measures include:
In recognition that the pandemic has had a disproportionate impact on women’s employment, the Budget includes the promised “Women’s economic security statement” but the size of the support package may disappoint some.
Just over $240 million has been allocated to “create more opportunities and choices for women” in science, technology, engineering and mathematics (STEM) as well as male-dominated industries and business.
As part of its job creation strategy, the government also announced $14 billion in new and accelerated infrastructure projects since the onset of COVID.
The projects will be in all states and territories and include major road and rail projects, smaller shovel-ready road safety projects, as well as new water infrastructure such as dams, weirs and pipelines.
The construction industry will also be supported by the first home loan deposit scheme being extended to an extra 10,000 new or newly built homes in 2020-21. This scheme allows first home owners to buy with a deposit as low as 5 per cent and the Government will guaranteeing up to 15 per cent.
As widely tipped, the government will follow up last year’s tax cut by bringing forward stage two of its planned tax cuts and back date them to July 1 this year to give mostly low and middle-income taxpayers an immediate boost.
As the table below shows, the upper income threshold for the 19 per cent marginal tax rate will increase from $37,000 a year to $45,000 a year. The upper threshold for the 32.5 per cent tax bracket will increase from $90,000 to $120,000.
As a result, more than 11 million Australians will save between $87 and $2,745 this financial year. Couples will save up to $5,490.
Marginal tax rate* | Previous taxable income thresholds | New taxable income thresholds |
0% | $0-$18,200 | $0-$18,200 |
19% | $18,201-$37,000 | $18,201-$45,000 |
32.5% | $37,001-$90,000 | $45,001-$120,000 |
37% | $90,001-$180,000 | $120,001-$180,000 |
45% | More than $180,000 | More than $180,000 |
Low income tax offset (LITO) | Up to $445 | Up to $700 |
Low & middle income tax offset (LMITO) | Up to $1,080 | Up to $1,080** |
*Does not include Medicare Levy of 2%
**LMITO will only be available until the end of the 2020-21 income year.
You don’t need to do anything to receive the tax cuts. The Australian Taxation Office (ATO) will automatically adjust the tax tables it applies to businesses and simply take less. It will also account for three months of taxes already paid from 1 July this year so workers can catch up on missed savings.
In another move that will help protect jobs in the hard-hit small business sector, business owners will also get tax relief through loss carry back provisions for struggling firms. This will allow them to claim back a rebate on tax they have previously paid until they get back on their feet.
Businesses with turnover of up to $5 billion a year will be able to write off the full value of any depreciable asset they buy before June 2022.
Around 2.5 million pensioners will get extra help to make up for the traditional September rise in the Age Pension not going ahead this year. However, self-funded retirees may feel they have been left out.
Age pensioners and as well as people on the disability support pension, Veterans pension, Commonwealth Seniors Health Card holders and recipients of Family Tax Benefit will receive two payments of $250 from December and from March.
This is in addition to two previous payments of $750 earlier this year.
After the terrible toll the pandemic has waged on aged care residents and the elderly, the Government will add 23,000 additional Home Care packages to allow senior Australians to remain in their home for as long as possible.
Funding for mental health and suicide prevention will also be increased by $5.7 billion this year, with a doubling of Medicare-funded places for psychological services.
Underperforming super funds are to be named and shamed with a new comparison tool called Your Super. This will allow super members to compare fees and returns.
All funds will be required to undergo an annual performance test from 2021 and underperforming funds will be banned from taking on new members unless they do better.
As the underlying Budget assumptions are based on finding a coronavirus vaccine sometime next year, Government projections for economic growth, jobs and debt are necessarily best estimates only.
Only time will tell if Budget spending and other incentives will be enough to encourage business to invest and employ, and to prevent the economy dipping further as JobKeeper and JobSeeker temporary support payments are wound back.
Another test will be whether the Budget initiatives help those most affected by the recession, notably young people and women.
The Government has said it is prepared to consider more spending to get the economy out of recession. The Treasurer will have another opportunity to fine tune his economic strategy fairly soon, with the next federal budget due in just seven months, in May 2021.
If you have any questions about any of the Budget measures and how they might impact your finances, don’t hesitate to contact us.
Information in this article has been sourced from the Budget Speech 2020-21 and Federal Budget support documents.
It is important to note that the policies outlined in this publication are yet to be passed as legislation and therefore may be subject to change.
Patrick Flynn · ·
After a year when even the best laid plans have been put on hold due to COVID-19, people who were planning to retire soon may be having second thoughts. You may be concerned about a drop in your super balance, insecure work, or an uncertain investment outlook.
Whatever your circumstances, a financial tune-up may be required to get your retirement plans back on track. You may even find you’re in better financial shape than you feared, but you won’t know until you do your sums.
The best place to start is to think about your future income needs.
Your retirement spending will depend on your lifestyle, if you are married or single, whether you own your home and where you want to live.
Maybe you want to holiday overseas every year while you are still physically active or buy a van and tour Australia. Do you want to eat out regularly, play golf, and lead an active social life; or are you a homebody who enjoys gardening, craftwork or pottering in the shed?
Also think about the cost of creature comforts, such as the ability to upgrade cars, computers and mobiles, buy nice clothes, enjoy good wine and pay for private health insurance.
It’s often suggested you will need around 70 per cent of your pre-retirement income to continue living in the manner to which you have become accustomed. That’s because it’s generally cheaper to live in retirement, with little or no tax to pay and (hopefully) no mortgage or rent.
To get you started, the ASFA Retirement Standard may be helpful. It provides sample budgets for different households and living standards.
As you can see in the table below, ASFA suggests singles aged 65 would need around $44,183 a year to live comfortably, while couples would need around $62,435.i Of course, comfort is different for everyone so you may wish to aim higher.
Modest lifestyle | Comfortable lifestyle | |||
Single | Couple | Single | Couple | |
Annual income | $28,220 | $40,719 | $44,183 | $62,435 |
Savings required at retirement | $70,000* | $70,000* | $545,000 | $640,000 |
Source: ASFA, as at March 2020. Assumes home ownership.
*The fact that these figures are the same reflects the impact of receiving the Age Pension.
To put these figures in perspective, the full Age Pension is currently around $24,550 a year for singles and $37,013 for couples. As you can see, this doesn’t stretch to ASFA’s modest budget, let alone a comfortable lifestyle, especially for retirees who are paying rent or still paying off a mortgage on top of other expenses.
Then there is the ‘known unknown’ of how long you will live. Today’s 65-year-olds can expect to live to an average age of around 85 years for men and 87 for women. Half will live longer than that, many into their 90s. The challenge is to ensure your money lasts the distance.
Once you have a rough idea what your ideal retirement will cost, you can work out if you have enough super and other savings to fund it.
Using the ASFA benchmark for a comfortable lifestyle, say you hope to retire at age 65 on annual income of $62,000 a year until age 85. Couples would need a lump sum of $640,000 and singles would need $545,000. This assumes you earn 6 per cent a year on your investments, draw down all your capital and receive a part Age Pension.
Add up your savings and investments inside and outside super. Subtract your debts, including outstanding loans and credit card bills, to arrive at your current net savings. Then work out how much you are likely to have by the time you hope to retire if you continue your current savings strategy.
There are many online calculators to help you estimate your retirement balance, such as the MoneySmart super calculator.
If you want to leave an inheritance for the kids or help them financially sooner rather than later, then you will need to factor this in. Do be aware though that there are limits to how much you can give away without affecting your Age Pension entitlements.
Under the Centrelink gifting rules, you are only permitted to give a maximum of $10,000 in one financial year and $30,000 over five financial years before the excess is counted towards your Age Pension assets and income tests.
If there’s a gap between your retirement dream and your financial reality, you still have choices.
If you have the means, you could make additional super contributions up to your concessional cap of $25,000 a year. You may also be able to make after-tax contributions of up to $100,000 a year or, subject to eligibility, $300,000 in any three-year period.
You might also consider delaying retirement which has the double advantage of allowing you to accumulate more savings and reduce the number of years you need to draw on them.
These are challenging times to be embarking on your retirement journey, but a little planning now could put you back in the driver’s seat.
Get in touch if you would like to discuss your retirement strategy.
i https://www.superannuation.asn.au/resources/retirement-standard