What you need to know from the 2021-22 Federal Budget

What you need to know from the 2021-22 Federal Budget

As Scott Morrison kept reminding us this morning, ‘we are fighting the pandemic’ and so the Federal Budget focuses on key spending to drive Australia’s economic recovery.

This is a Budget promoting economic growth and employment. While you will have those who continue to have major concerns over government debt and the continued spending, could it be that we are seeing a ‘new’ way of thinking when it comes to debt? My colleague, James Weir, wrote a paper explaining this with Modern Monetary Theory (“MMT”), suggesting maybe the focus on debt is unwarranted?

So here are the simply the main features of the 2021-2022 Budget;

Personal Income Tax

Low and middle income tax offset

This will be extended to 2021-2022 providing a reduction in tax of up to $1,080 to low and middle income earners.

Superannuation

Federal Budget - Superannuation

Removing the work test

This is actually a significant change. Individuals aged 67 to 74 years will be able to make non-concessional super contributions, or salary sacrifice super contributions without meeting the work test.

However, in order to make personal deductible contributions, you will still need to meet the work test.

Downsizer contributions

The charges announced in the Budget from that article include reducing the eligibility age for 65 to 60 years of age. This scheme allows a one-off contribution of $300,000 per person from the proceeds of the sale of their home.

To learn more about downsizer contributions and how it can work for you check out my blog here.

SMSF residency restrictions

From 1 July 2022, the Government will extend the central control test from 2 years to 5 years and remove the active member test.

Super guarantee threshold

The $450 per month minimum income threshold under which employers are not required to make a super contribution for employees will be removed 1 July 2022.

First Home Buyer Scheme (FHBS)

From 1 July 2022, the Government will increase the amount of voluntary contributions to $50,000 which may be released for the purchase of a first home.

Family Support

Family Home Guarantee

The Government has introduced the Family Home Guarantee to support single parents with dependants buying a home. This is regardless of whether they are a first home buyer or a previous owner-occupier. From 1 July 2021, 10,000 guarantees will be made available over four years to eligible single parents with a deposit of as little as 2%, subject to an individual’s ability to service a loan.

The Government is also providing a further 10,000 places under the New Home Guarantee in 2021/22. This is specifically for first home buyers seeking to build a new home or purchase a newly built home with a deposit of as little as 5%.

Increasing childcare subsidy (CCS)

To ease the cost of childcare and encourage a return to the workforce, from 1 July 2022 the Government proposes to provide a higher level of CCS to families with more than one child under age 6 in childcare. The level of subsidy will increase by an extra 30% to a maximum subsidy of 95% for the second and subsequent children. For example, currently a family may receive a 50% subsidy on childcare costs for each child if family income is between $174,390 and $253,680. Under the proposal, the family would receive a CCS of 50% of costs for their first child and 80% for their second and subsequent children. The annual CCS cap of $10,560 for families earning between $189,390 and $353,660 will also be removed.

Social Security

Pension Loan Scheme

The Government has announced added flexibility by allowing up to two lump sum advances in any 12 month period up to 50% of the annual pension.

The Government will also not claim back any more than the sale price of the house used to guarantee the payment.

Aged Care

The Government has announced a $17.7b investment in aged care reform over the next 5 years which will cover:

  • Additional Home Care Packages
  • Greater access to respite care services
  • A new funding model for residential aged care
  • A new Refundable Accommodation Deposit (RAD) support loan program.

Business Support

COVID Package

The Government will extend until 30 June 2023 the instant write-off of depreciable assets as well as the ability for qualifying companies to claim back tax paid in prior years from 2018-2019 where tax losses occur until the end of the 2022-2023 financial year.

The gift that keeps on giving

The gift that keeps on giving

If you’re tossing up what to give your kids who are a little more grown up for Christmas this year, there’s a gift that will keep on giving for years and years to come; in fact, you can rest assured they’ll be thanking you for it after they’ve retired. Make a contribution to their super fund.

One of the most powerful forces in finance is compounding – earning interest on your interest. And the longer you allow something to compound the bigger it gets. One of the attractions of giving your child a contribution to their super fund for Christmas is that they can’t touch it until they retire, so it’ll have decades to grow, and grow.

To illustrate the power of compounding, and the benefit of starting early, consider this classic example, represented in chart 1. Let’s say we find an extraordinary 18-year-old who decides to build up her nest egg by investing $2,000 a year for the next ten years at a return of 7% p.a. By the time she reaches 65, that $20,000 she invested has grown to be worth just shy of $387,000, as shown by the blue in the chart.

Now let’s say her friend finds out about the plan after year ten and says, hey that’s a great idea, but you know what, I’m going to put away $2,000 every year until I’m 65 in that same 7% investment. By the time he hits 65 the $72,000 he’s invested over those 36 years has grown to be worth only $369,000. And as the orange part of the chart shows, he never catches up to our early starter. That’s the power of compounding.

Chart 1: Despite investing more the late starter never catches the early bird due to compounding

1

If your child has a superfund already set up, which could be from as young as 15 with a part time job at a supermarket or something, you could make a contribution that starts working today and will pay off hugely in their future. (Another big tip, do them a favour and make sure there aren’t any fees for things like life insurance being deducted, which will just devour any returns.)

For example, if you were to contribute $1,000 to your 20 year old child’s super fund and it earns 7% per annum, by the time they reach 65 it will be worth $23,123; at 8% per annum it would be worth $36,164. You can work in multiples of that amount, so if you deposit $100 at 7% it’ll be worth $2,312 and if you deposit $10,000 it’ll be $231,235. It would be a great way to kickstart their retirement savings.

You should also, of course, make sure your child hasn’t hit their contribution caps.

For anyone looking to give something they can be sure won’t go out of fashion or never be looked at a second time, boosting your kid’s superfund really is the gift that will keep on giving.

Death Duties and Super?

Death Duties and Super?

A recent article from Noel Whittaker titled ‘This is Australia’s version of a death tax’ prompted a few questions from some of our elderly clients.

It’s not really a ‘death tax’ as such, but it reminds people about how your superfund may actually pay tax upon your death.

We wrote a more comprehensive article on this very subject earlier in the year titled “What happens to my super when I die?” which you can access here.

To keep it simple, your super doesn’t incur tax on death if it’s passed onto a ‘dependent’, which is defined in this instance as a

  • spouse
  • child under the age of 18
  • any person over 18 years and financially dependent or in an interdependent relationship.

If the beneficiary doesn’t qualify as a ‘dependent’, a tax of up to 15% (plus the Medicare Levy) may apply to the ‘taxable’ component of your super balance. Your super generally consists of both a ‘taxable’ and a ‘tax free’ component, even if you’re in the pension phase.

There are strategies you can consider to reduce the ‘taxable’ component but given everyone’s situation is just that little bit different, it’s important you speak with your adviser, or alternatively call us, and we can work out the most appropriate and tax effective course of action.

Interesting enough, if you are over 65 years of age (or over 60 years and permanently retired from the workforce), you can simply make lump sum withdrawals from your super fund tax free. So, if you know your death is imminent, withdrawing your balance from super can be a way to avoid ‘Australia’s version of a death tax’. But be certain, because if it’s a false alarm, it may be that you can’t get your money back into the super environment, and you’re likely to be paying tax all over again.

As I previously mentioned, if you would like greater detail on superannuation death benefits, simply click here.

Things to think about before gifting your kids money

Things to think about before gifting your kids money

It’s natural that a parent would like to be able to help their kids out financially, especially if it’s to get a foot on the property ladder when even that first step can seem so out of reach these days. But you need to think carefully before you hand over a couple of hundred thousand dollars because if things go pear shaped a big chunk of that money could disappear.

Let’s imagine you give your child $100,000 to put towards buying a $1 million house, then not long after your child meets a partner and they move in together. If they end up marrying or the relationship becomes de facto, which according to the Family Law Court is after at least two years, but the relationship falls apart, your child’s ex can make a claim for a financial settlement. It’s possible your kid’s ex could get half the house, including half the money you gave your own child.

And if it’s your son and there’s a child involved the financial settlement can be a long way from 50/50. Within a few years of a very generous gesture, a big chunk of the money could well have gone.

It is apparently possible that a Family Court Judge will make an allowance where the relationship didn’t last very long and they conclude the spouse doesn’t really deserve to share in the money the parents gave. But that is far from certain.

There are two things you can do. First, rather than gift the money to your child, lend it to them. The value of the loan will be excluded from financial settlement proceedings. You want to make sure the deal is characterised as a loan from the outset and the smartest way to do that is going to the trouble of getting formal loan documentation drawn up by a lawyer so if there’s a dispute the courts will be left in no doubt what the arrangement is.

You can even lodge a mortgage against the property, with specific clauses requiring that any partner must enter an agreement with respect to the money.

The second approach is to have your child’s new partner sign what’s referred to under family law as a “Binding Financial Agreement”, pretty much the equivalent of what is popularly referred to as a ‘prenup’. Your child’s partner would have to acknowledge the money you’ve given and agree that it’s not to form part of any financial settlement in the event of divorce or separation. This is much easier if the money is used for something readily identifiable, like a house deposit, but it can get more complex if it’s intermingled with other money.

Again, the wording of such an agreement has to be quite specific and certain protocols have to be met, like having the signatures witnessed by a lawyer or Justice of the Peace, so it’s pretty much a necessity to use a lawyer.

It’s worth bearing in mind that it’s not just a relationship breakdown where the money you gave can end up in someone else’s hands, if your child goes bankrupt their creditors can end up with it too. Here again, having the money tied up in a formalised loan should protect it.

There are two other considerations: if you’re receiving a government pension, under the so-called ‘$10,000 rule’, Centrelink will look at gifts and transfers exceeding $10,000 per year, or $30,000 over five years, when calculating whether you qualify under the assets test. This includes paying school fees.

Secondly, if your child is taking out a loan to buy the property a lender is likely to want to know if the deposit is being part-funded by someone other than the borrower, and it would be a really bad idea to fudge things in an effort to make it easier for your kid to get the loan.

Helping your child out financially should be a heart-warming experience, taking a few precautions can help stop it turning into a gut-wrenching one.

A tax effective alternative to superannuation

A tax effective alternative to superannuation

One of the reasons superannuation is so popular is the associated tax benefits, but last year the government imposed new limits how much money you can get in to super.

Investment bonds are another tax effective investment strategy that’s been around for years and is becoming popular again as an investment vehicle for tax payers on the highest marginal rate, or indeed anyone paying more than 30% tax. Investment bonds are flexible and easy to establish and manage, but you do need to be aware of a couple of ‘quirks’.

For a start, the opening amount you put into the bond can be whatever you like; unlike superannuation where you are limited in how much you can put in. What you actually invest in will be determined by the provider of the bond, but the range is pretty broad and includes things like managed funds, fixed income, property and cash.

After your initial contribution you don’t have to put any more into the bond if you don’t want to, but you can choose to increase your investment by a maximum of 125% of whatever you put in the year before. So each year the amount invested can grow. Chart 1 shows how much you could invest if you start off with $10,000.

Chart 1: you can start an investment bond with as much or little as you like and and add 125% of your previous year’s contribution every year
A tax effective alternative to superannuation table1

Over the life of the bond all the earnings are reinvested, again, much like your super fund. That way you get to benefit from the magic of compounding.

For the life of the bond, which is a maximum of 10 years, the earnings from the investments are taxed inside the bond at 30%, though that rate can be reduced by franking credits. In other words, you don’t have to pay anything out of your pocket while the bond is going, provided (and here’s one of the tricky bits), you let the bond run its full term.

If you do let it go the full 10 years, at the end, you receive all the earnings from the bond and won’t have to pay any further tax on them, plus of course you get back what you invested. That means you’ll have paid 30% tax on the earnings instead of 45%. Importantly, the 10 years starts from the time you make the initial investment, not any subsequent investments. So if you follow the schedule in the table above, the $74,506 invested in year 10 is only tied up for 12 months.

If, for some reason, you have no choice but to break the bond inside the 10 years, you’re allowed to do so, but you’ll have to pay some tax; the amount depends on when you break it.

If you stop within the first eight years, you receive all the earnings but you’ll have to pay the difference between the 30% tax that’s been paid inside the bond while it was in force and your marginal tax rate. In other words, there’s no real tax benefit.

If you stop during year nine, one-third of the earnings are tax-free but you’ll pay your marginal rate on the rest. If you stop during year 10, two-thirds are tax-free.

There are other attractive aspects to investment bonds, like you can nominate beneficiaries of the bond without having to make it part of your will. Also, every investment bond has a built in life insurance policy, and the death benefits can go to any nominee tax-free – regardless of how long the bond’s been going for. Finally, unlike superannuation, the rules around investment bonds have been stable since 1995.

There is one downside to bear in mind: because investment bonds are effectively taxed like a company CGT is paid in full when the bond is redeemed, regardless of how long it’s been held. That compares to the 50% CGT discount when you hold an asset in your own name and sell it after 12 months, or in super, where you pay 10% CGT after 12 months.

Investment bonds are making a comeback as a useful tax planning tool for high income earners and can be a great way to save for a specific objective, like a house deposit, education costs or a boost for grandkids.