The cuts are now personal Grinding out the numbers

Baby, forget the bonus. With tax concessions gone the federal government's budget could also affect your health, writes John Collett.

The 2013-14 federal budget delivered not that much for the personal finances of most people. It mostly deferred or scrapped tax breaks that had been promised, but not yet delivered, and so will hardly be missed.

But the baby bonus of $5000 for the first child will go in favour of giving parents an extra $2000 through Family Tax Benefit Part A. And from July 1 next year there will be a half a percentage point rise in the Medicare Levy to help pay for the DisabilityCare Australia scheme.

The budget confirmed the dumping of a boost in benefits for those receiving family Tax Benefit Part A. The increase would have been worth up to $600 a year to eligible families and was supposed to take effect from July 1.

Then there is deferral of the tax cuts that were to begin in 2015 to compensate for future price rises due to the carbon tax. These cuts would have been effected by an increase in the tax-free income tax threshold from $18,200 to $19,400. The budget reveals there will be an annual $2000 cap on the deductibility of work-related self-education expenses from July 1, 2014, where now there is no upper limit.

The superannuation changes were released in early April. These are mostly aimed at trimming the superannuation tax concessions for the very well off, though there will be an increase in the maximum that can be salary-sacrificed into super by older Australians.

One of the few surprises from the budget, from a personal finance point of view, is that $112.4 million has been set aside to allow seniors who downsize their home to have up to $200,000 of the sale proceeds quarantined from the Centrelink means test for the age pension.

The three-year trial of the downsizing program will start from July 1 next year. (See box at right).

The government has also committed a further $226 million to improve cancer prevention, detection, treatment and research. And close to $700 million will be spent over five years to add new medicines to the Pharmaceutical Benefits Scheme. A "My Aged Care" website and call centre will be established this year to make it easier to access information.

Superannuation

Of the superannuation changes, the most significant for most people is the lifting of the cap on how much can be salary-sacrificed into super for older Australians. From July 1 this year the cap will rise to $35,000 for those aged 60 and over from the $25,000 that applies to everyone else. From July 1, 2014 the $35,000 cap will apply to those aged 50 and over. Laura Menschik, a financial planner and director of WLM Financial Services, says the rise in the cap is a welcome change. "People in their 50s and 60s have fewer costs if they have been paying down their mortgage and no longer have their kids' education costs," she says. "Perhaps one of the couple has returned to full-time work and the couple can really start putting away some of the money for their retirement."

Salary-sacrificing into super is a powerful way to build retirement savings. That's because each dollar of pre-tax pay that is sacrificed has the income tax that would have been paid on the money swapped with the 15 per cent contributions tax on superannuation.

Those earning less than $37,000 a year pay less in income tax than the 15 per cent superannuation contribution tax. To help them the government provides a 15 per cent contributions tax refund for those earning up to $37,000 a year, which is worth up to $500 a year.

However, the Coalition has said that if it wins government on September 14 it will axe the tax refund. While the budget confirmed the government will raise the superannuation guarantee from 9 per cent to 12 per cent from July 1, 2013 to July 1, 2019, the Coalition has said it would delay the rise in the superannuation guarantee by two years.

To better target the superannuation tax concessions, the budget confirmed those earning more than $300,000 a year will pay a contributions tax of 30 per cent instead of 15 per cent starting in the current financial year.

Retirement

The budget also confirms a change to the super rules that has the potential to reduce the age pension of those with fairly modest retirement savings. Retirees' investments in super will be "deemed" to have earned the same rate of interest as investments held outside of super.

The deemed rate is used by Centrelink to calculate the level of age pension under the income test. It is the rate used by Centrelink regardless of how much the investment actually earns.

As it works now, income from investments inside a superannuation fund producing an income stream are treated more generously than the deemed rate of return.

Under the change, most retirees will likely be reporting a higher deemed income to Centrelink and will probably have their age pension reduced.

However, the change will apply only to new superannuation income streams assessed after January 1, 2015.

Philip La Greca, head of technical services at AMP SMSF Administration, says the grandfathering of those with superannuation income steams and those taking out income superannuation streams before January 1, 2015 is welcome. He says it would have been administratively simpler for the government to have effected the changes immediately.

"The grandfathering is a good decision because people have made a decision based on the existing set of rules and the goalposts will not be changed," he says.

The government is also encouraging age pensioners to work part-time with its Work Bonus, which provides an exemption of $250 a fortnight for employment income from the pension income test. Any unused amount can be used to offset future earnings up to a maximum of $6500.

Medical expenses hit

The government will phase out the net medical expenses tax offset. This is where people can claim a tax offset for 20 per cent of their out-of-pocket medical expenses above an annual threshold of $2060. It is the medical expenses not covered by Medicare and private health insurance.

There are transitional arrangements available to those currently claiming the offset. Those who made a claim in 2012-13 will be able to make a claim in 2013-14 and those who make a claim in 2013-14 will be able to make a claim again in 2014-15. However, claims for the offset can still be made for expenses relating to aged care, disability aids and attendant care until July 1, 2019, even if no claims for the offset have been made before.

"Those that claim the offset are already spending a lot of money on medical expenses and this will make it a lot more expensive for them," says Louise Biti, a director of Strategy Steps, which provides technical support to financial planning firms.

Downsize without losing some pension

From July 1 next year, retirees will be able to sell their family home and downsize with up to $200,000 of the sale proceeds quarantined from the means test for the age pension.

The government will trial the policy for three years. The policy is aimed at older retirees who are struggling with the upkeep of their family home and want to downsize but who fear they will lose some of their age pension.

The policy comes with a number of restrictions that could limit its uptake. For example, the sale proceeds of up to $200,000 have to be put into a special account. If any money is withdrawn from the account, the exemption for the means testing for the age pension is lost. Also, the exemption only lasts for 10 years.

The home owner can use the exemption when downsizing to a retirement village or granny flat, but not into residential aged care. Another limitation is that the family home has to have been owned for at least 25 years.

Laura Menschik, a financial planner with WLM Financial Services, says the policy appears to be aimed at those over about 75.

As the proceeds of the sale kept in the special savings account cannot be accessed without losing the means test exemption for the age pension, it appears to be more useful as an "estate planning measure" than anything else, Menschik says. She says retirees who are asset rich but income poor should also investigate reverse mortgages on the family home, in which the lender takes a share of ownership in the house in return for the loan, which is not repaid until the house is sold.

It may allow people to stay in their family home for longer, though it could affect their age pension, Menschik says.