- Social Security
- Income Tax
Described by commentators as the most significant budget since 1996, the 2014/15 Federal Budget is significantly different to budgets we have seen in the last 15 years. Federal Budgets in years gone past were usually just tinkering around the edges with a range of tax cuts. Last year we moved towards tax increases and again and this year no one escapes. If you have recently made a family budget or made some financial goals you need to sit down again and make sure you will stay on track. In spite of this, most changes do not start until a few years into the future. Also to keep in mind Federal Budget changes are proposals and before coming into effect need to be legislated by the Houses of Parliament.
The government has taken the position that current social security arrangements are not financially sustainable and as such, social security in the 2014/15 Federal Budget has had some substantial changes in an effort to reduce costs to the tax payer.
Continuing the work of the last government, the 2014/15 Federal Budget has announced the Aged Pension eligibility age will continue to rise from the age of 67 to the age of 70 gradually over time based on the date of birth of the individual. Based on ages, the changes will not occur until 2025.
MoneyGeek Comment: This has been long coming. The aged pension was introduced by the Federal Government in December 1910. In 1910 was payable to men from age 65 and women from age 60. Initially payments were set at a quarter of the minimum wage ($52 per year!) and at a time when the life expectancy was 55 years. Basically it was expected that not many received it. In 2014 someone aged 65 is expected to live past 83, almost 30 years longer compared to 1910 when the aged pension was set. Although access to social security benefits has shifted, access to superannuation has not. At this stage, superannuation is still accessible at age 60, tax free. You can retire at the same age, however you need to make sure that your retirement plans are set early and you keep your superannuation healthy. Not sure how? Seek advice and be prepared to make small sacrifices now to be more comfortable later.
Indexation of Social Security Payments and Payment Thresholds
Currently, Social Security payments are typically indexed to ‘Male Total Average Weekly Earnings’ an increase roughly 3 – 3.5% p.a. It has been proposed to peg pension increases to the rate of inflation (known as Consumer Price Index – CPI) which is currently 2.9% (and averaged 2.7% over the last 10 years). The change will apply to Parenting Payment (Single) from 1st July 2014 and from the 1st September 2017 for the Aged Pension, Disability Support Pension, Carer Payments, Bereavement Payment and DVA Service Pensions. From September 2014, the Seniors Supplement will cease to be paid to those who hold a Commonwealth Seniors Health Care Card (CSHC). The Clean Energy Supplement will continue to get paid, however will no longer be indexed. September 2017 also sees an adjustment to deeming thresholds reducing from $46,600 to $30,000 for singles and from $77,400 to $50,000 for couples. This means that financial investment income will have a larger reduction in payments from September 2017 than what it does now for people assessed under the Income Test.
MoneyGeek Comment: Although Parenting Payment (Single) is affected in July 2014, other pensions will not be affected until 2017, after the next election. In any case the base rate of pensions are not decreasing, but the rate will not grow as much if the CPI rate is under Male Total Average Weekly Earnings. The impact on the deeming thresholds isn’t overly significant on it’s own. For every $100,000 that a pensioner holds in financial investments, a reduction of about $1.90 per fortnight for an individual and roughly $1.50 per fortnight per individual in a couple. The biggest impact will come with the cessation of the Seniors Supplement which will reduce the overall payment by around $800 per annum for singles and $660 each in a couple.
Other Social Security Changes
A number of proposals have been made for non-aged pension benefits including;
- A 1 week waiting period in addition to other waiting periods (e.g. Liquid Assets Waiting Period) will apply to the Parenting Payment, Widow and Youth Allowances from 1st October 2014
- A 2 year freeze on the base rate and maximum rate of Family Tax Benefit A and B. A reduction in the end of year Family Tax Benefit A and B Supplements with the ending of indexation on these amounts from 1st July 2015. This will see the supplements reduce from $726 p.a. to $600 (Family Tax Benefit Part A) and from $354 to $300 (Family Tax Benefit B).
- A reduction in the primary income earner threshold for Family Tax Benefit Part B from $150,000 to $100,000 from 1st July 2015 and the removal of the higher thresholds per additional child for Part A from the same date.
- From 1st January 2015, Newstart and Youth Allowance applicants under the age of 30 will be required to wait 6 months before receiving benefits (and during the 6 month period must show satisfactory participation in job search and employment support). Once on payment, applicants will need to work 25 hours per week in a “Work for the Dole” scheme (some exemptions will apply). Newstart eligibility age will increase from 22 to 25.
- From 1st July 2014 there will be a work capacity reassessment for some Disability Support Pension (DSP) recipents who are under the age of 35. Additional effort will be placed on DSP reciepents to increase work capacity with the introduction of additional work capacity support and compulsory activities.
One of the more controversial measures proposed in the 2014 Federal Budget sees three major changes to Medicare; co-payments for medical services, safety net threshold changes and a removal of State Government restrictions on charging patients at hospital emergency departments. The idea is not new, a similar scheme was introduced in 1991 by Bob Hawke but then axed by Paul Keating. From 1st July 2015 co-payments will apply in the following circumstances;
- $7 GP consultations and out-of-hospital blood and imaging tests (i.e. x-rays).
- An increase in the co-payment for prescriptions by $5
The GP co-payment will be limited to 10 visits per year for concession card holders and for children under the age of 16 and rather than a $5 increase for prescription co-payments, concession card holders will have their increase limited to $0.80. To deter people seeking treatment at hospital emergency departments to avoid the fee, the Federal Budget proposes to remove the restrictions currently placed on State Governments – allowing them to charge the co-payment at emergency departments.
MoneyGeek Comment: There is no obligation for the State Governments or even individual doctors to charge the co-payments (doctor who don’t however will be out of pocket by $5 per consultation). It is unlikely that doctors or the state governments will avoid the charge and for those who currently get bulk-billed will see the payment apply. For those who are not bulk-billed will see their medicare refund reduce by $5 when they claim. In any case, the cost of medical care will increase for individuals, with savings made by the government being funneled into what will be known as the “Medical Research Future Fund.”
Delayed Employer Superannuation Contribution Increases
The 2014/15 Federal Budget proposes to delay the increase in Superannuation Guarantee payments (the contributions your employer makes on your behalf). The rate of Superannuation Guarantee is still moving towards 12%, however the time that it will take to get there is going to be extended.
MoneyGeek Comment: The rate of Superannuation Guarantee will still reach 12%; however will take longer to get there. Employer Contributions tend to come at the cost of salary, so the government expects to take in more income tax by less going into super. It has long been believed that 9% is not enough to have a comfortable retirement (take note of pension changes!) so don’t wait for the government to force 12% – consider salary sacrificing the extra amount into superannuation now!
Excess Superannuation Contributions
There has been a trend in recent years of increasing numbers of people contributing in excess of their superannuation contributions caps. Currently an individual can make an after tax contribution of $150,000 p.a in to super. Breach this cap and you incur a massive level of taxation. From the 1st July 2013 allows that individual to withdraw the excess amount plus earnings to be taxed at their marginal tax rate.
MoneyGeek Comment: This is a positive announcement to provide relief to individuals who inadvertently breach their caps. Not necessarily directed at high income earners; families saving for retirement who use this cap to contribute the proceeds of redundancy payouts or investment property sales will benefit from this change. Important to note that you need to elect to withdrawal otherwise the excess superannuation contributions will be taxed under the existing regime.
Temporary Debt Levy – Increase in top Marginal Tax Rate
A change in the 2014/15 Federal Budget that has received alot of air time is the “Temporary Debt Levy” that will apply to higher income earners. From 1st July 2014 until 30th June 2017 individuals earning over $180,000 will see their marginal tax rate increase from 45% to 47% plus the increased Medicare Levy of 2% (up from 1.5%) seeing a total marginal tax rate of 49%. An individual earning $200,000 will pay a total of $67,947 in income tax (including Medicare Levy) an increase of $1,400 as a result of this measure. As a result of the Temporary Debt Levy, the Fringe Benefits Tax rate and any other rate that is based on the highest marginal tax rate (i.e. Withholding Tax) will also increase by 2% potentially impacting a far wider group of people.
MoneyGeek Comment: Most high income earners I don’t think will have any issue paying an extra 2% in tax. Like every Levy, for those who sit just over $180,000 will be able to make extra superannuation contributions or negatively gear an investment to avoid paying the extra levy tax. Overall increasing the highest marginal tax rate alone, makes tax reducing strategies more attractive as tax savings made by these strategies increases by the same amount (a taxpayer earning $200,000 could save 34 cents in the dollar by contributing to superannuation compared to taking it as salary!).
HELP / HECS Changes
Currently HELP (formerly HECS) debts have been indexed by the Consumer Price Index (CPI) which averages between 2 – 3%. From the 1st January 2016, the rate of interest charged on HELP/HECS Debts will be pegged to the 10 year Federal Government Bond rate. This rate is subject to a maximum of 6% and historically has averaged at 5.5%. In addition a lower HELP/HECS repayment band will be introduced from $50,638 where a 2% of taxable income will be repayed towards the HELP/HECS debt.
MoneyGeek Comment: Generally there has been little incentive to repay HELP/HECS debt quickly or at all. With a total national HELP/HECS debt at over $26 billion and over $6 billion of this deemed unlikely ever to be repaid – something needed to change. Personally in the past I have tried to keep my taxable income just under the repayment threshold knowing that my $21,000 HELP debt would, in real dollar terms, be no different. The longer I didn’t pay it, the better off I would be! This has all changed now – with the interest payable on HECS/HELP debt increasing (the current 10 year bond rate is approx 4%) there will be more of an incentive to repay this debt quicker, although unless the interest rate increases above my mortgage, it will still get the lowest priority!
First Home Saver Accounts (FSHA)
The under performing First Home Saver Account scheme will basically cease from the 13th May 2014. Accounts opened after this date will no longer receive concessions and the Government Co-Contribution will cease from 1st July 2014.
Other Income Tax Changes
There are proposals to freeze and remove some thresholds and concessions including;
- From 1st July 2014, a three year freeze on Private Health Insurance Rebate and Medicare Levy Surcharge income thresholds. As incomes rise over the next three years – more people will fall into the higher taxed (or lower concession) tiers.
- There is currently a phase out of the Dependent Spouse and Mature Age Worker Tax Offset, however this phase out will cease and these tax offsets will cease as of the 30th June 2014.
The whole theme of this budget is about increasing taxation and reducing concessions to reduce budget deficits into the next 4 – 5 years and to improve the structural (think fixed costs of the government) position of the nations books. Unfortunately as a result the amount we pay and receive from the government will increase and careful budgeting and planning will be needed to reduce the impact.
Unsure on how the budget will impact you or have questions about some of the announcements? Please comment below!
About the Author – The Money Geek
The Money Geek is the head money blogger for MoneyGeek.com.au. With over 8 years experience in the finance industry, the Money Geek provides information over a range of topics to help families Australia-wide improve their financial literacy to become their own geeks and take control of their financial future!