Welcome to Finance and Fury. This episode we’ll be talking about latest federal budget that was announced this week – and the implications this will have for individual

There were many announcements in the budget – few good things like the reduced tax on innovated products – but we will be focusing on individuals

Many of these announced changes haven’t passed legislation yet – but very likely they will – the budget for individuals focused on taxation, superannuation and housing

Personal Income Tax cuts – not too much has changed here

  1. The Government continues its Personal Income Tax Plan with the announcement of a number of measures targeted towards low and middle-income earners – the changes to the tax rates is still expected to continue as planned
    1. The aim of this is to provide immediate relief to individuals and support economic recovery by boosting consumer spending
    2. Comes from the demand side of economics – allowing people additional income to spend more within the economy to boost GDP – as the majority of our GDP comes from consumer spending, allowing people to keep most of their own money can assist with GDP – but it does depend on how the money is spent
  2. Retaining the low- and middle-income tax offset for another year
    1. The low and middle income tax offset (LMITO) was a temporary measure introduced – but this has been extended for a further financial year to the 2021-22 income year.
    2. The LMITO provides a reduction in tax of up to $1,080 for those earning less than $90,000 and will be received on assessment after individuals lodge their tax return- basically it means you get an extra $1,080 back at tax time – it starts to reduce once you exceed the threshold – but it is still more money in you pockets
    3. It is estimated that more than 10 million low and middle-income earners are expected to benefit from the extended tax cut
      1. Save the Australian population $7.8 billion in tax – the government expects the extra cash will flow towards businesses, encouraging more employment or investment – boosting GDP by around $4.5 billion in 2022-23
      2. Right away here there is something that stands out – that they don’t expect all of these funds to be actually spent – consider the concept of the multiplier effect – where $1 within the economy should lead to more in an increase in GDP – granted that this can take more than a year to potentially materialise – but 42% is expected to be retained by individuals
    4. Self-education expense deductions
      1. The Government will also remove the exclusion for the first $250 deduction for prescribed courses of education. The first $250 of expenses relating to prescribed course education is currently not deductible. The measure aims to reduce compliance costs for individuals claiming self-education expenses.
      2. This is another minor change – but at least if you are taking a course to further your income capacity in your current job you can claim the full amount of your education costs

Superannuation –

  1. Superannuation guarantee increase – this isn’t specifically a part of this budget as it was meant to occur a number of years ago – but the increase in SG is occurring from 1 July to 10%
    1. The superannuation guarantee refers to the minimum percentage of earnings an employer needs to pay into their employee’s superannuation fund. The superannuation guarantee is currently 9.5%, but will increase on 1 July 2021 to 10%
    2. Can provide an additional boost to individuals superannuation – but might have some unintended consequences
    3. An individual’s superannuation balance is expected to benefit all things being equal – i.e. same wage levels and wage growth – but SG is based around wages
    4. Most employers look at total package – what will it cost to employ someone– wages plus SG and any other benefits –
      1. Wages of $80k used to have $7,600 of SG on them – total package of $87,600
      2. Now an employer either needs to find an additional $400 per employee or reduce any wage rises by $400 – as the new SG is $8k – this doesn’t sound like a great amount in the grand scheme of things – and that is correct – but an employer with 1,000 employees now need to find an additional $400k for this – and this is just the first of the planned increases – meant to increase to 12% – or for someone on $80k this is $9,600 or an extra $2k p.a.
  • This equates to $200k for a medium employer with 100 employees, or $2m for a larger company with 1,000 employees
  1. there are pros and cons to this
  2. Pros are that at least people are forced to have savings for retirement
  3. Examples – someone starting off their career with $50k income – works for 30 years and gets wage growth of 3.5% p.a. on average – assuming super gets 8% return p.a.
    1. 5% – $827k in super
    2. 12% – $1.044m in super or $217k more
  4. The CC cap will be increased as well to $27,500 – this is another change that was already on the cards – but is coming into effect 1 July – the CC cap will increase by $2,500
    1. This means that people can salary sacrifice an additional amount each financial year
    2. This is a benefit – allows people more room to SS more into superannuation – this is good as the changes over the years have been to reduce the CC cap – even though over time with the devaluation of the dollar and inflationary pressures, it should have been going up
    3. initially this was an unlimited cap – then $150k, then $50k when I started in the industry, then got brought down to $25k.
  5. Superannuation Guarantee Eligibility Threshold removed
    1. The Government is proposing to remove the $450 per month minimum income threshold which determines whether employees have to be paid the superannuation guarantee by their employer.
    2. Currently, where employees are paid $450 or more (before tax) in a calendar month, superannuation guarantee is payable on those wages. This threshold was introduced to prevent the administrative burden of facilitating the superannuation guarantee for employers with employees in casual employment arrangements.   
    3. This proposed measure will ensure lower income earners are not missing out on the benefit of having superannuation accrue for their retirement. In particular, an estimated 300,000 individuals would currently be eligible to receive these additional superannuation guarantee payments
    4. So the minimum monthly income threshold of $450 before super guarantee contributions are payable by employers will be abolished – given SuperStream and Single Touch Payroll exist, the admin burden has been lessened slightly – but one thing to watch out for if you are a casual worker is to make sure you track your super payments – make sure you have the one fund
  6. First Home Super Saver Scheme (FHSSS) changes aimed to increase uptake
    1. In the latest change to the scheme, the maximum releasable amount of voluntary concessional and non-concessional contributions has been increased from $30,000 to $50,000.
    2. Voluntary contributions made from 1 July 2017 up to the existing limit of $15,000 per annum will apply towards the total amount able to be released. This increase will apply from the start of the first financial year after Royal Assent, expected to occur by 1 July 2022. The increased cap will ensure the FHSSS continues to help first home buyers raising a deposit more quickly, primarily through the special tax treatment of super and associated investment earnings.
  7. Self Managed Superannuation Funds (SMSFs) & residency
    1. SMSFs have long been disadvantaged from a tax perspective where SMSF members are absent from Australia for extended periods of time. In this budget the Government proposes to relax the rules such that the SMSF and members now only need to meet two rules to be eligible for concessional tax treatment:
      1. The fund must be established in Australia or hold an asset in Australia
      2. The members cannot be temporarily absent from Australia for more than five years.
    2. Other changes that affect older Australians
    3. The Work Test has been proposed to be abolished – From 1 July 2022 Australians will no longer need to meet the work test to be eligible to make non-concessional superannuation contributions and receive salary sacrifice contributions after reaching preservation age
      1. The old rules were that anyone over the age of 65 would need to meet a work test to contribute to superannuation – make a non-concessional contribution or salary sacrifice contribution
      2. Individuals aged 67-74 years will still have to meet the work test to make personal deductible contributions
      3. The worst test is that you are working at least 40 hours in a 30 day consecutive period
    4. Downsizer contributions – From 1 July 2022, Australians over 60 years of age will be eligible to make downsizer contributions. Previously the downsizer contribution was limited to Australians over age 65. The other eligibility criteria for the downsizer contribution remain unchanged.

Housing 

  1. The government has established a new Family Home Guarantee, which will be awarded to 10,000 families with single parents, allowing them to build a new home or purchase an existing home with a 2 per cent deposit
    1. The Family Home Guarantee is set to allow single parents to purchase a property with a deposit as low as 2%, with the government guaranteeing the remaining 18%. Applicants can either build a new home or purchase an existing home.
    2. Usually, home buyers would need to save up at least a 20% deposit, or take out lenders mortgage insurance (LMI) which can leave them thousands of dollars out of pocket.
    3. The Family Home Guarantee is limited to 10,000 places. However, this will be spread out over four financial years – which equates to 2,500 spots per year – The Federal Government says about 125,000 single parents will be eligible for the scheme. That means only 8% of eligible families would benefit from the measure over the four-year period – or 2% per year
    4. Eligibility for the Family Home Guarantee – Single parents with dependants who earn up to $125,000 per year – must also be Australian citizens and at least 18 years old. The scheme is open to first home buyers as well as those who have previously owned a home.
  2. The New Home Guarantee – An extra 10,000 places in the New Home Guarantee scheme will be added for 2021-22
    1. This is similar to the family home guarantee – as the government guarantees the remaining 15% of the deposit value – so it can help to support first home buyers in building a new dwelling or to purchase a newly constructed
    2. The New Home Guarantee scheme helps first home owners build or purchase a new home with a deposit as low as 5 per cent.
    3. But that means existing properties are not eligible for the scheme, which limits the opportunities for prospective first home owners living and working in capital cities or built-up areas.
  3. With these measures as well as the FHSSS – can help people get into property
  4. But the thing to watch out for is that you are getting either a 98% loan or a 95% loan –
    1. In both cases the government is guaranteeing the remaining 18% and 15% level of funds that would be needed to make up the 20% deposit to avoid LMI – but I don’t believe that they are putting up the capital for you as a deposit –
    2. As an example – buying a $600k property – normally you need $120k as a deposit
    3. With the FHG – you need $12k – plus stamp duty (depending on if you are eligible to get any concessions on this depending on the state you live in) – But means you have a $588k loan
      1. So your repayments will be higher and you will still need to prove that you can afford your loan repayments with the bank
      2. With a 20% deposit at 2.8% = $1,972 p.m. in repayments, with 2% = $2,416 p.m. = extra $5,328 p.a.
    4. Other consideration is that if prices go down slightly, you would be left with more debt than property value – so you may be trapped in the property and cant sell unless you are willing to take the loss and come up with the funds to repay the bank
  5. HomeBuilder – 12-month extension of the HomeBuilder construction commencement period for existing applicants
    1. This was the $25k for new home construction or renovations above $150k – there has been massive delays in the building industry so the extension is in hopes that people where were expecting it won’t miss out

Summary:

  1. Budget for individuals does have some small improvements for individuals
    1. Extension for income tax offsets
    2. Additional superannuation for employees
    3. Additional foothold in the door for property – but can come at some risks to be aware of

Thank you for listening to today’s episode. If you want to get in contact you can do so here: http://financeandfury.com.au/contact/ 

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