In today's special edition of your Eureka Report you'll get a very clear idea of what really happened in Tuesday's Budget and what investors like you should do next. Also don't forget we have a live webcast on the Budget and its potential outcomes at 2.30pm which I'll host with guests Robert Gottliebsen and Dr Doug Turek (you will be able to view the video at 2:30pm tomorrow via this link: click here.)
The outstanding point to understand this week is that Treasurer Scott Morrison has broken a central principle of the superannuation system: Until now investors have worked on the assumption that once you finally made it into retirement, your savings inside that tax shelter would never be touched by the government...that's no longer true.
Put simply, the Treasurer has imposed a tax of 15 per cent on every dollar over $1.6 million you might have in super. This is how it will work:
From July 1 2017 the maximum amount you can now have to fund your pension on which you pay zero tax is $1.6m – any money above that amount will be taxed at 15 per cent.
Despite endless comments from the Turnbull regime that they would leave pensioners alone, the move directly affects anyone over 65 - the only hope the measure may not hit in the manner planned (ie. to raise $2 billion) would be if the Liberal party can not get the changes through parliament. For Eureka readers this is most likely the biggest item in the budget.
The other key measures in the budget relate primarily to the accumulation phase of super rather than the pension phase. Here's what you need to know:
• The amount that you can contribute on a concessional (pre tax salary sacrifice) basis to super has been cut to $25,000. It used to be that if you were under 50, the limit was $30,000 and over 50 the limit was $35,000.
• If you are making non concessional contributions - that is money on which tax has already been paid - there are very big changes here:
Until now you could put $180,000 each year into super on a non-concessional basis or $540,000 over three years.Under the new arrangements, the maximum you can put into superannuation over the course of your entire working life on this basis will be $500,000 – in other words you can put in less over the length of your life from here onwards than you could previously put in over just three years.
In many ways a key issue now is how to build wealth outside super – Robert Gottliebsen today examines the budget and suggests some new longer term strategies (to read more, click here), Scott Francis gives the details on what is actually allowed outside superannuation that still has tax advantages (to read more on this, click here) and financial planner Bruce Brammall tells us what he is going to be telling his clients (read his piece - click here) in the week ahead.
One last thing – remember not every budget measure comes to pass, or comes to pass in the shape announced in the budget papers.
A few other changes:
Personal income tax and bracket creep
In an effort to address the effects of bracket creep (you can read more in this analysis from Scott Francis, click here), from July 1 2016 the 32.5 per cent tax rate will apply to all income up to $87,000 – previously once an income earner reached $80,000, they would enter the 37 per cent marginal tax bracket.
This move is intended - according to the budget papers - to encourage Australians to “work, save and invest” – in reality it’s worth about $6 per week, if you earn above $87,000 you will enter the 37 per cent bracket with the remainder of your income.
Closing the superannuation gap
Along with changes to contributions and the $1.6m tax free limit in retirement accounts, the budget proposed a number of reforms to help close the super gap for low income earners and working mothers – last week’s Senate report into economic security for women in retirement (read the report here) put forward a number of recommendations to narrow the gap between the final super balances of Australian men and women.
The government’s policy here includes a Low Income Superannuation Tax Offset (LISTO) which gives a tax offset to low income earners, including women working part time or having exited the workforce to care for children, provided they earn $37,000 or less in a year, and the ability to rollover unused concessional contributions so that those who take a career break can catch up on contributions later.
We’ve spoken to several stakeholders about these changes today, and it looks like these measures will still require strict planning if you want to take advantage of them – we’ll be looking at this in more detail in the weeks to come.
Start up investors
As Robert Gottliebsen writes today, this budget continues a shift in rhetoric away from all Australians having a conventional job to an emphasis on start-ups, innovation, and small enterprises starting from nothing. The Australian start up community seems a bit underwhelmed with the actual budget measures underlying the buzzwords in the Treasurer’s speech, but for investors this budget should prompt an examination at least of start-up tax advantages if you wish to diversify your portfolio in this area.
Earnings on deferred lifetime annuities will be tax exempt from July next year. "This will allow providers to offer a wider range of retirement income products which will provide more flexibility and choice for Australian retirees, and help them to better manage consumption and risk in retirement, particularly longevity risk, wherein people outlive their savings," the government argued. After this week's budget, annuities and insurance bonds - which both offer tax advantages outside the super system - should become more popular .
Goodbye to the work test
In another measure aimed at boosting the retirement prospects of older Australians, all individuals up to the age of 75 will be allowed to make pre-tax super contributions, regardless of whether they are working. Under the current rules, people between the age of 65 and 74 are allowed to make concessional contributions only if they meet a strict work test. Under the new rules, which are estimated to cost the government $1bn over the forward estimates, all individuals up to the age of 75 will be able to claim a tax deduction for personal super contributions.
We hope you enjoy the our Budget coverage and if you miss Thursday's webcast it will recorded and presented on the site for viewing any time you like.