We’re heading for a $1.5 billion surplus, but at what cost?

On Tuesday evening the 8th of May, the Treasurer handed down the 2012/13 Federal Budget in Parliament. The lead up to this event has been mixed. Some economists have suggested that the Government’s desire to bring the budget back to a surplus is overzealous, especially at a time where many businesses are going through redundancies, Europe remains uncertain and the Australian dollar is high. Other economists however, argue that Australia should be seeking to secure its position, given the ongoing issues facing Europe and the continued growth in Asia.

Against the backdrop of a minority government, very low inflation (currently at 1.6% in May), relatively low unemployment (5.2%), and falling interest rates (as recently announced by the Reserve Bank of Australia) we take a look at the key elements for those interested in the financial planning implications of this latest Federal Budget.

Helping households
The cornerstone of the Federal Budget this year appears to be about the carbon tax, and in turn, helping households deal with the cost increases associated with this tax.

According to the official Federal Budget website:

“The estimated impact on consumer prices of a $23 carbon price is 0.7 per cent in 2012/13, or around $9.90 on average per week for households, which includes $3.30 per week on average electricity expenditure and $1.50 per week on average gas expenditure. Nine out of ten Australian households will benefit from assistance through tax cuts, increases in pensions, increased allowances and family payments or a combination of the above, worth an average of $10.10 per week per household.

The Household Assistance Package starts from May this year with an initial payment to families and parents, seniors and individuals who receive a Government payment. This will be followed by tax cuts in July. Ongoing household assistance will become a regular part of Government payments between March next year and early 2014.”1

At this present time, we are not able to describe specifically how the “Household Assistance Package” will benefit clients. However, we expect more details to be released over the coming weeks and months.

Superannuation and retirement changes
The Treasurer re-announced the raising of the Superannuation Guarantee Contribution (SGC) from 9% to 12% from 1 July 2013 to 1 July 2019. This change will benefit the retirement savings of all working Australians who are entitled to receive the SGC from their employers. There were also several new superannuation initiatives announced that may impact you or someone you know.

  • A deferment of the higher concessional contributions cap for older Australians with superannuation balances below $500,000, with a revised start date of 1 July 2014. At the present time, the concessional contributions cap is $50,000 for people aged 50 or over until 30 June this year.
  •  Australians earning up to $37,000 will get a boost of up to $500 to their superannuation savings from 1 July 2012. This reform will allow low-paid workers to effectively pay no tax on their superannuation guarantee contributions. At the present time, all Australians pay 15% on these contributions.
  • From 1 July 2012, individuals with incomes greater than $300,000 will have the tax concession on their contributions cut from 30% to 15% (excluding the Medicare levy). This means they will lose this tax benefit. This reform will affect around 128,000 people or 1.2% of Australians contributing to superannuation.

Changes to superannuation are likely to cause increased administration burdens upon both businesses and superannuation trustees. At the present time, a 15% superannuation contributions tax is charged for all, but removing tax on the superannuation guarantee for low income Australians will present a challenge. Personal, industry and self-managed superannuation funds are not required to hold records of how much income their members earn. Without this information, it is unclear how this tax can be applied. The Government may negate this challenge by still charging the tax on superannuation guarantee contributions and then refunding them in the same way they pay the government superannuation co-contribution. We will have to wait and see how this is implemented. As always, the devil is in the detail on issues like this.

At the other end of the spectrum, those retiring and those with high incomes will need to look at the new rules to determine how they can now best maximise their own opportunities for securing their optimal retirement outcomes.

Businesses will need to fund and administer any changes and superannuation increases. Superannuation trustees will need to ensure that they are charging the right amount of tax for each individual member and may rely upon businesses for this information. This could present challenges as businesses are likely to be focused on ensuring they are paying the right amount of superannuation, given the increasing SGC rate.

National Disability Scheme won’t negate your need for personal insurances
The Treasurer announced a small amount of initial funding for a National Disability Scheme which is designed to assist Australians who have become disabled. Funding expenditure totalling $1 billion will be provided over four years. The Government aims to assess 10,000 participants to commence from July 2013, increasing to 20,000 participants from mid 2014.

At the present time, further details of this new scheme are unclear. However, given that it will be funded by the public purse, it is our assessment at this time that the scheme is unlikely to replace the need for income protection and other personal insurances, especially against the rising costs of living from the carbon tax. We outline our reasons for this assessment below.

At Financial Services Partners, we know from our own clients’ experience that traditional Government support is not enough when the unexpected occurs. We are confident that a personal wealth protection strategy that can include income protection cover, trauma and total disability insurance are essential considerations if you want to be fully protected. Life cover is also important even though it falls outside of what you would expect to find in a disability scheme. Life cover remains essential for funeral costs, extinguishing mortgage and other debts as well as providing a source of income for your dependants. This is why we believe a total personal wealth protection strategy remains so important for individuals who want to be properly prepared for the unexpected.

Aged care advice is still essential
With an aging population, aged care is a concern for an increasing number of Australians. In this Federal Budget, the Government has recognised and outlined the need to create a more consistent approach to aged care as the kinds and cost of care are different, depending on where you live. Not surprisingly, the Government will be funding additional aged care places. The complexity of the system will remain in the foreseeable future so aged care advice is still essential if you have concerns.

What does it mean for me?
The information provided above is our interpretation from the information we have seen from Budget night. It is not yet law. Once the Budget legislation is passed and the initiatives outlined take their final form, your adviser will be able to assess your situation and provide you with personal advice to help you make the most of the changes. Until then, your adviser and their support team at Financial Services Partners will work to make sure we identify all potential client opportunities.

You can never get enough good advice
Identifying opportunities resulting from legislation changes, such as the Federal Budget, requires significant time and effort. At Financial Services Partners, we believe that everyone should have the opportunity to realise a brighter future. If you like our content, please feel free to share it with your family, friends and colleagues.

Sources:
Treasurer’s budget speech – 8 May 2012.
Budget website and all incorporated content within the website-
1. http://www.budget.gov.au/2012-13/content/ministerial_statements/climate/html/climate_change-03.htm

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