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1. Introduction
2. Superannuation
3. Social Security
4. Taxation
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Portfolio Managers'
Investor Insights
May, 2009
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Welcome to our budget special edition of Investor Insights.
Please feel free to forward this newsletter to any friends or associates that may find the information beneficial.
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 Introduction
 In the face of global economic uncertainty, the Government’s 2008-2009 included a number of changes to superannuation, social security and taxation. The good news is that much of the bad news had been strategically leaked over the last week so we were (at least nominally) prepared.
This newsletter provides a summary of the key items affecting investors and how they may affect you.
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HERE'S A THOUGHT . . .
"A journey of a thousand miles begins with one step." - Lao Tzu
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Superannuation
Reduction in Contribution Caps
Date of effect: 1 July 2009
The concessional contribution (CC) caps for those under and over age 50 will be halved from 1 July 2009. As a consequence of these changes, the annual non-concessional contribution (NCC) cap will become six times the CC cap (as it applies to those under age 50).
The table below shows the caps for the current financial year and the new reduced caps for 2009/10.
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Contribution cap
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2008/09
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2009/10
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Concessional contributions cap
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• Under age 501
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$50,000
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$25,000
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• Over age 50 (until 30/6/2012)2
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$100,000
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$50,000
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Non-concessional contributions cap3
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$150,000
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$150,000
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3-year Non-concessional contrbutions cap4
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$450,000
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$450,000
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CGT cap1 (lifetime limit for eligible business owners)
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$1,045,000
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$1,100,000
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1 These thresholds are indexed in line with movements in Average Weekly Ordinary Time Earnings (AWOTE) in increments of $5,000 (rounded down).
2 This cap is not indexed.
3 This cap is equal to six times the CC cap from 1 July 2009. It will change when the CC cap is indexed.
4 This cap only applies to individuals less than 65 on the first day of the financial year. The year in which the 3-year cap is initially triggered determines the value that can be contributed during the 3-year period.
Comments:
• The reduction of the concessional contribution cap to $25,000 ($50,000 transitional to 30 June 2012) does not apply until next financial year. Clients therefore have six weeks to make the most of the higher 2008/09 CC cap. For this purpose, contributions must be received and recorded by the fund no later than 30 June 2009.
• Next year’s cap reduction means employed clients will need to review their salary sacrifice arrangements and self-employed clients their personal deductible super contributions and consider contributing more this financial year. In addition, all clients may need to consider drip-feeding contributions over a longer period in order to meet their retirement goals
• The reductions to the caps make it less likely that older individuals can top up their super benefit in the years immediately preceding retirement. Younger people will therefore need to contribute more over their lifetimes despite competing priorities of home and family.
Transition to Retirement Pensions Remain
No specific change was announced regarding transition to retirement (TTR) strategy. However, the contribution cap change may impact individuals who utilise strategies which combine salary sacrifice and TTR pensions.
Comment:
• Clients currently undertaking TTR strategies and who make concessional contributions of $50,000 or less per annum will not be impacted by the contribution cap change.
• Those making concessional contributions in excess of $50,000 will need to review their strategy to ensure it is rebalanced for the post 1 July 2009 contribution rules. This may include:
– reducing the amount of their salary sacrifice or personal deductible contributions;
– reducing the income from their TTR pension;
– if already drawing the minimum income from their TTR, rolling some of their TTR pension into accumulation phase of superannuation (keeping in mind the continued temporary reduction in minimum payments for 2009/10), or
– contributing surplus income as personal after-tax contributions after reaching the new concessional cap (care should be taken as this is generally, only appropriate for some individuals age 60 or over).
Reduced Government Co-contribution
Date of effect: 1 July 2009 – 30 June 2014
As anticipated, there has been a reduction to the maximum rate and amount of Government co-contributions for eligible clients who make personal after-tax contributions to super.
This is a temporary reduction and applies in the five years from 2009/10 to 2013/14. From 2014/15 the co-contribution again increases to a maximum of $1,500. The reduction to the maximum rate and amounts of the Government co-contribution are summarised in the table below.
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Contribution year
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Matching rate
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Maximum co-contribution
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2009/10
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100%
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$1,000
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2010/11
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100%
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$1,000
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2011/12
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100%
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$1,000
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2012/13
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125%
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$1,250
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2013/14
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125%
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$1,250
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2014/15 onwards
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150%
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$1,500
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Comment:
• Clients may need to consider making additional contributions – whether non-concessional or concessional - to top up their superannuation to maintain net contributions at 2008-2009 levels.
• The co-contribution is still an extremely attractive scheme despite the reduction of the multiplier.
Pension Drawdown Relief Continued
Date of effect: 1 July 2009 – 30 June 2010
In a press release on 18 February 2009, the Government announced that clients in account based pensions, allocated pensions and term allocated pensions (TAPs) would only be required to draw down half their calculated minimum income requirement3 for 2008/09. This relief has been extended for a further 12 months to 30 June 2010.
Comment:
• A client commencing an account-based pension from 1 July 2009 can defer an annual pension payment (equal to 50% of the legislated minimum) to 30 June 2010. Their next pension payment is not required to be drawn until 30 June 2011. This enables the client to maximise their tax-free earnings in their pension by limiting and deferring pension payments where possible.
Lost Superannuation Accounts
Two small amendments have been made to the treatment of lost superannuation amounts. These changes are:
• superannuation providers will be required to transfer lost accounts with balances less than • $200, or which have been inactive for five years and for which there are insufficient records to identify the owner of the account, to unclaimed monies. This measure will apply from the 2010/11 income year; and
• superannuation provider’s obligations under the unclaimed money regime will be matched • with the requirements of the temporary resident unclaimed superannuation regime. The amended regime will apply to payments of unclaimed money due after 1 July 2009.
Comment:
• To avoid superannuation accounts being claimed by the government as unclaimed monies, members should immediately search for any lost super accounts and consolidate all small super balances.
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HERE'S A THOUGHT . . .
"The best preparation for tomorrow is doing your best today" - Henry Jackson Brown
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Social Security
Unless otherwise stated, all measures in this section are proposed to take effect on 20 September 2009.
Pension Payments to Increase
The Government announced an increase to the Age Pension. The full rate single pension will be increased by $32.49 a week, while the full rate pensioner couples (combined) pension will be increased by $10.14 a week.
These increases will be provided in two forms: through an increase in the base rate of pension for singles and an increase through the new Pension Supplement for both singles and couples.
New Pension Supplement
A new pension supplement will be introduced which will be an amalgamation of the former GST pension supplement, Pharmaceutical Allowance, Utilities Allowance and Telephone Allowance. The new supplement will be available to all income support payments with the exception of Newstart allowance, Special benefit and Sickness benefit recipients. For the new pension supplement the government will provide an increase (included in the increased government support pension amount detailed above) of -
• $2.49 per week increase for singles; and
• $10.14 per week combined increase for couples.
>From 20 September 2009 a new seniors supplement will be established for Commonwealth Seniors Health Card holders and veterans eligible for the Gold Card. It is the amalgamation of the former Seniors Concession Allowance and the Telephone Allowance. The single rate of the Seniors Supplement will include an extra $129 a year, to bring it to two thirds of the rate paid to couples combined.
New Index for Pensioners
To ensure base pension rates keep up with community living standards, the Government announced a new price index will be developed to index base pension rates. Designed specifically for households who rely on the pension, the new Pensioner and Beneficiary Living Cost Index will generally be higher than the CPI. The CPI will still be used to index relevant eligibility thresholds.
Age Pension Age to Increase
Date of effect: 1 July 2017
The qualifying age for the Age Pension and the Commonwealth Seniors Health Card for men and women will be increased to 67 years, at a rate of six months every two years, beginning in 2017, to reach 67 on 1 July 2023.
Comment:
• The Government is currently reviewing a recommendation from the AFTS (Henry) review panel to align the superannuation preservation age with the higher Age Pension age from 2017. Further analysis of potential gaps between employment and access to super may be required in industries or arrangements where compulsory retirement must occur at an earlier age than the proposed Age Pension age.
Pension Income Test Taper Rate Change
The income test taper rate will increase from 40 to 50 cents in the dollar for a single pensioner and from 20 to 25 cents in the dollar for each member of a couple above the allowable income free thresholds. (The asset test taper rate is unchanged at $1.50 per $1,000 of assets above threshold.)
This threshold is currently $138 per fortnight for single pensioners and $240 per fortnight for pensioner couples (combined). Existing part pensioners affected by the income test changes will not have their entitlements reduced by this change and they will receive an increase of $10.14 per week for singles or couples combined. The additional income free area available for those pensioners with children will be abolished to align the pension income test with the allowance and family payments income tests. Age pensioners and service pensioners will have employment income assessed fortnightly, with only half of the first $500 of fortnightly employment income to be counted in assessing their pension entitlement.
Pension Bonus Scheme to Close
The Pension Bonus Scheme will be closed to new entrants. (Existing members may continue to accrue entitlements.)
An income test concession will be introduced instead. Clients registered prior to closure will continue accruing entitlements as previously. To compensate for the closure of this measure, the Government will introduce a new pension income test concession for people of Age Pension age. The concession will mean that only 50% of the first $500 of employment income per fortnight will be counted for income test purposes. At a 50 cent taper rate, this concession equates to a maximum increase in age pension entitlement of $3,250 pa (single or couple combined).
Comment:
• A person may need to evaluate whether the bonus or the concession is more beneficial to them. This may depend on the amount of years for which a person intends to stay in employment, the amount of years which they have already accrued, or the percentage of Pension Bonus to which they will be entitled.
• The maximum bonus payable after two accrued years for a single person is $5,570.40 (as at 20 March 2009), whereas the maximum concession value for 2 years of Age Pension is $6,500. After three accrued years however, the maximum bonus is $12,533.30, but the maximum concession is valued at only $9,750. If the person will not be entitled to the full bonus, the income test concession may become more favourable.
• If eligible, and beneficial, ensure clients register for the Pension Bonus Scheme before 20 September 2009.
Changed Income Definition for Commonwealth Seniors Health Card
Date of effect: 1 July 2009
The definition of adjusted taxable income for the purposes of the Commonwealth Seniors Health Card will not include the gross tax-free superannuation pension income which was previously announced in the 2008/09 Budget. However, the Government will proceed to include income that is salary sacrificed to superannuation in the income assessment with effect from 1 July 2009.
Based on this announcement, from 1 July 2009 the definition of Adjusted Taxable Income (ATI) used for CSHC will include:
• Taxable Income
• Fringe Benefit
• Target foreign income
• Net investment losses
• Salary sacrifice super contributions
• Personal deductible super contributions.
Comment:
The Government's decision to reverse their stance on including tax-free income payments/withdrawals for clients over age 60 (as well as any Tax Free component paid out to clients under age 60) is a significant win for clients. This would certainly have been influenced by their recent difficulties in having this measure passed through the Senate. It will also enable clients to take larger one-off super/pension payments in a particular year without affecting their entitlement to the Seniors Health Card.
Residential Aged Care Fees to Increase
The Government has decided that of the $32.49 per week increase in the single base pension, $22.40 per week will flow to the residential aged care provider and $10.09 will flow to the pensioner. This is to enable older Australians who reside in aged care facilities to have some money left after paying their fees and to meet the rising health and care costs they face.
Residential Aged Care Fees to be Protected for Self-funded Retirees
As the rate charged to self-funded retirees is linked to the rate paid by pensioners, an increase in the Age Pension of this size would normally mean the fees faced by self-funded retirees would increase.
The Government recognises a sudden cost increase for existing self-funded retiree residents would be an unfair burden. It has therefore decided that those in residential aged care on 19 September 2009 will have their existing fee levels protected until they leave. Those that enter aged care after this date will have any cost increase phased in over four years. The arrangements for self-funded retirees will also apply to protected part-rate pensioners who do not receive the full pension increase.
Carer Supplement to be Introduced
Date of effect: 30 June 2009
Those receiving Carer Payment and Carer Allowance will receive a non-taxable, non-means tested payment. The payment amount will be:
• $600 pa to all Carer Allowance recipients for each person in care, and
• $600 pa to all Carer Payment recipients.
As people receiving Carer Allowance almost invariably receive Carer Payment, they will receive at least $1,200. The first payment will be made before 30 June this year, while regular payments will commence from 1 July 2010.
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HERE'S A THOUGHT . . .
" Vision + Passion + Action = Success"- Rony Tan
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Taxation
Announced Tax Cuts from 1 July 2009
In accordance with the tax cuts announced in last year’s budget, the new personal income tax thresholds for the 2009- 2010 year will be as follows:
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Income threshold
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Tax rate
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$0 - $6,000
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0%
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$6,001 - $35,000
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15%
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$35,001 - $80,000
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30%
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$80,001 - $180,000
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38%
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$180,000+
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45%
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Low Income Tax Offset Enhancements Confirmed
The Government has confirmed the maximum low income tax offset will continue to increase progressively to reach $1,500 per year from 1 July 2010. As a result, the amount of tax-free income low-income earners can receive each year (and the upper limit to which a partial offset can be claimed) will gradually increase.
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2008/09
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2009/10
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2010/11 (and thereafter)
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Maximum offset
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$1,200
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$1,350
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$1,500
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Upper income threshold1
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$60,000
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$63,750
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$67,500
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Maximum tax-free income
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$14,000
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$15,000
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$16,000
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1 The lower income threshold will remain at $30,000 for all years.
Tax-free Incomes for Older Australians
People aged 60 or over will still be able to receive unlimited tax-free incomes from pension investments commenced from a taxed super fund. The table below shows the amount of taxable income that can be received tax-free by older Australians in other circumstances.
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People who are:
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Tax-free incomes1
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2008/09
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2009/10
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2010/11
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Aged 55 to 59 using pension investments2
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• Singles
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$44,211
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$45,789
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$48,158
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• Per member of a couple
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$44,211
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$45,789
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$48,158
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Eligible for SATO not using pension investments
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• Singles
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$28,867
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$29,867
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$30,685
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• Per member of a couple
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$24,680
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$25,680
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$26,680
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1 Does not include the Medicare Levy, but includes the low income tax offset and SATO, where applicable.
2 Assumes no income from other sources is received.
Increased Medicare Levy Low Income Threshold
Date of effect: 1 July 2009
The Government will increase the Medicare levy low income threshold to $17,794 for individuals and $30,025 for individuals in families. The additional amount of threshold for each dependent child or student will also increase to $2,757. The Medicare levy threshold for pensioners below age pension age will also be increased to $25,299. This is to ensure that pensioners below age pension age will not have a Medicare liability where they don’t have an income tax liability.
Family Tax Benefits Changes
FTB Part A to be indexed by CPI
Date of effect: 1 July 2009
This measure will make FTB Part A consistent with other family payments, such as FTB Part B and the Baby Bonus. Currently, the maximum rate of FTB Part A for children under the age of 16 is benchmarked to a proportion of the combined couple rate of pension payments, or adjusted by the CPI, whichever is higher.
Pause to Indexation of Upper Income Thresholds of FTB Part A, FTB Part B and Baby Bonus
Date of effect: 1 July 2009
The upper income thresholds for family payments will remain at their current level until 1 July 2012. This includes:
• The FTB Part B primary earner income threshold, which will remain at $150,000,
• The income threshold for receiving the dependency tax offsets, which will remain at $150,000,
• The Baby Bonus eligibility threshold, which will remain at $75,000 of family income in the six months following the birth or adoption of a child (equivalent to $150,000 a year), and
• The higher income-free area of FTB Part A, which will remain at $94,316 of family income (plus $3,796 for each child after the first).
These thresholds would ordinarily be indexed by CPI.
Additional Small Business Tax Break
Date of effect: 13 December 2008
The Government will expand the small business tax break announced in February. Small businesses will now be entitled to a bonus deduction of 50% where they acquire an eligible asset between 13 December 2008 and 31 December 2009 and install it ready for use by 31 December 2010. The previously announced 30% and 10% bonuses will continue to apply for all other businesses.
Comment:
• The additional small business tax break will allow small businesses with turnover of less than $2 million to claim a bonus tax deduction of 50% of the cost of eligible assets costing more than $1,000. Eligible assets include tangible depreciating assets, such as computers and vehicles, and new expenditure on existing assets used in carrying on a business for which a deduction is available under the capital allowance provisions of the Income Tax Assessment Act 1997.
Employee Share Scheme Eligibility
Date of effect: 13 May 2009
Under the current rules an employee can elect to be assessed on discounts provided on shares or rights in the year they are acquired under an employee share scheme. If no election is made the discount is taxed at a later time. If the employee makes an election to be taxed upfront they receive a tax exemption of up to $1,000 on the discount.
The proposed measure will:
• remove the existing election and access to discounts provided on shares or rights in the financial year they are acquired. Consequently, removal of the tax deferral option will ensure that remuneration in the form of share discounts are taxed at an appropriate time and rate and will result in a reduction of tax avoidance opportunities, and
• limit access to the upfront concession to employees with an adjusted taxable income of less than $60,000 per year, resulting in a better take-up and availability of employee share arrangements by low and middle income earners.
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This newsletter contains general information only and does not take into account the investment objectives, personal circumstances or financial needs of any particular investor. You should therefore obtain professional financial advice before making any investment decision based on the information provided in this document. In the event that this newsletter contains information about a particular financial product, you should also obtain a Product Disclosure Statement in respect of that product prior to making any decision to acquire that product.
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For more information please contact:
Brett Davis, Paul Hewins or Danielle Barber
Portfolio Managers Pty Ltd
Ph: (03) 9226 0835
Fax: (03) 9222 2019
Australian Financial Services Licence No. 232459
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