As the dust settles we come to realise this year’s budget key objective was to promise a series of elongated tax cuts and to shorten the pathway to a budget surplus. Under long-term and politically improbable plans the Coalition would introduce a flatter tax system. As the political reality of those objectives play out, investors might concentrate on the changes that actually should come to pass.
One theme is the government’s decision to try to optimise the tax-free status of the family home by adding initiatives on reverse mortgages and at-home aged care. There is also some tweaking of the complex — but still useful — self- managed super fund system and a grab bag of measures aimed at either alleviating red tape or policing the system. For the investor, here’s what really happened.
Maximise the value of your home
Your home is a tax shelter and neither the ALP nor the coalition appears willing to challenge this reality. So Scott Morrison offered two measures in the budget that aim to take advantage of existing home values.
First, is the government-based reverse mortgage scheme which has been opened up to anyone of pension age. Reverse mortgages have not been popular in Australia but with an ageing population and very high property values such schemes may very well become common. The government might be surprised at how many people go for the scheme. In budget measures the upgrade of the scheme is costed at $11m.
Second, is the extra 20,000 assisted places made available for at-home aged care that offers more people an alternative to expensive residential aged care.
Recent reports argued Australia should lift its ratio of home-based care to residential care, it is clearly what consumers are demanding and government has at last made a move here. The popularity of at-home care can only have been intensified after a recent string of controversies among aged care companies such as Estia.
Big super funds forced to behave better
Among the many failures highlighted by the banks royal commission was the treatment of superannuation accounts. Two of the worst practices have been charging fees on low balance accounts and holding on to ‘‘lost’’ accounts. From July 1, 2019 a 3 per cent annual cap will be placed on so-called passive fees on accounts with the less than $6000 (about 9 million people) and exit fees will be banned from all super accounts.
Also from July 1, 2019 all funds that have inactive accounts with less than $6000 will be transferred to the ATO. The tax office will than have lost super centralised in one place and will be in charge of uniting clients with their money.
Major institutions compelling customers under 25 to take out life insurance have been taken to task by the Financial Services Minister Kelly O’Dwyer, who said she will introduce an ‘‘opt-in’’ arrangement in this area. There has been suggestions from insurance companies the move may lift prices for older people in the system (in theory life insurance would be dearer if only offered to an older segment of the population). O’Dwyer shot down these arguments fairly rapidly this week suggesting: “There is certainly a lot of vested interests and money at stake.”
SMSFs: morsels of good news
The politicians have a conundrum with SMSF funds. If they legislate that the funds can have too many members they will become something akin to family trusts. If they make the allowable number too small they are restrictive. Until now the limit to fund members in an SMSF has been four. It is going to move to six from July 1, 2019. For many families this will actually enable mum and dad and the adult kids to all be within the one ‘‘family’’ super fund. This structure has some genuine advantages as the fund can exploit different tax rates for different members. The trouble might come in keeping everyone happy within the fund.
Also a threatened acceleration in SMSF reporting requirements has been largely postponed. Under terms beginning in July 2019, most funds need only submit to three-year cycle audit returns. However, for those who have somehow fallen foul of the ATO, the government has retained the right to audit every year. The audit profession has been vocal in its alarm at this measure, voicing concerns again to O’Dwyer that initial problems could be inflated over a three-year period. On the other hand, auditors may also be concerned that they will have one-third of the work they thought they had in the SMSF system.
Useful super exemptions
For consultants, highly skilled tradespeople, roving company directors and others lucky enough to enjoy what’s known as a portfolio career, the Superannuation Guarantee Charge (SGC), where 9.5 per cent of all earnings must go into super, causes some headaches. What happens is that each employer acting in good faith pays SGC, each not knowing the worker is inadvertently breaching the modest $25,000 pre-tax (concessional) super contribution allowance. When people on big salaries (over $263,157, to be precise) are with one employer, the employer normally puts a cap on the SGC, avoiding issues for all concerned. Under a new budget measure, individuals with multiple employers will be able to nominate that their wages from certain employers are not subject to the SGC — they can, of course, negotiate alternative payments. It is also worth noting that the budget estimates confirmed the SGC would move to 10 per cent in 2021.
The ‘‘work tests’’ are one of the bugbears for retirees who wish to make more income — from July 2019 anyone aged between 65 and 74 with a total super balance of less than $300,000 will be able to make voluntary contributions to super for a year from the end of the last financial year they met the work test — in other words they will get a one-year exemption
By James Kirby
The Australian Business Review
12 May 2018
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