WILLIS COMMENTARY Federal Budget

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1 WILLIS EMPLOYEE BENEFITS WILLIS COMMENTARY 2009 Federal Budget On 12 May, the Treasurer handed down the Federal Budget for the 2009/010 year. The budget announcements include reducing superannuation salary sacrifice concessions from 1 July 2009; progressively increasing the age pension age to 67; reducing the private health insurance rebate; extending the First Home Owners Boost; and introducing paid parental leave. This edition of Willis Commentary provides a summary of the relevant budget announcements and how they may affect you. In this issue 2009 Federal Budget Consolidate and make the most of your Super Are you Eligible for $1,500 from the Government tax free? Is now a good time to fix your mortgage rate? For further information on any of the topics covered in this Willis Commentary, please contact Willis Employee Benefits: t: e: willis.com Superannuation Reduction of concessional contribution cap from 1 July 2009 The concessional (pre-tax) contributions cap will be reduced from $50,000 to $25,000 with effect from 1 July This cap will continue to be indexed. The transitional cap for concessional contributions for those aged 50 years and over will also be reduced, from $100,000 to $50,000. This reduced cap will apply for the 2009/10, 2010/11 and 2011/12 financial years, after which individuals aged 50 and over will revert to the lower $25,000 cap (indexed). The transitional cap is not indexed. The non-concessional (after-tax) contributions cap will remain at $150,000 for the 2009/10 financial year, and will only increase when the new lower $25,000 concessional cap is increased by indexation. Going forward, the non-concessional contributions cap will be calculated as six times the level of the (indexed) concessional contributions cap. There has been no change to the bring-forward provisions which allow eligible individuals to make non-concessional contributions of up to $450,000 over a three-year period. The existing grandfathering arrangements that apply to certain members of defined benefit schemes in relation to the concessional contributions cap will continue. These arrangements will also be extended to certain persons who were members of defined benefit schemes on 12 May Temporary reduction in the Government co-contribution The Government will temporarily reduce the maximum cocontribution that is payable on an individual s eligible personal non-concessional (after-tax) superannuation contributions, with effect from 1 July The maximum co-contribution payable will be reduced to $1,000 for contributions made in the 2009/10, 2010/11 and 2011/12 financial years, and to $1,250 for contributions made in the 2012/13 and 2013/14 financial years. The maximum co-contribution payable will return to $1,500 for contributions made in the 2014/15 and later financial years. The co-contribution income thresholds will continue to be indexed. Financial years 2008/ / / / / /15 and later Maximum co-contribution $1,500 $1,000 $1,250 $1,500 Reduction (per dollar of income in excess of the lower threshold currently $30,342) 5 cents 3.33 cents cents Trans-Tasman retirement savings portability scheme 5 cents The Government has agreed in principle to the signing of a memorandum of understanding with New Zealand to establish a trans-tasman retirement savings portability scheme. The portability scheme will permit transfers of superannuation savings between certain Australian superannuation funds and New Zealand KiwiSaver funds. CONTINUED ON PAGE 5 Page 1

2 CONSOLidate... In these volatile times, any savings you can make on your super plan will means more dollars in your account at retirement. Most funds charge a dollar a week account keeping fee. If you have two additional funds sitting idle, just by consolidating these can mean you are saving $104 a year which, thanks to compound interest can equal thousands at retirement! If you have had several jobs in the past, you may have accumulated super with a number of different super providers. Consolidating these accounts gives you more control over your paperwork and your investment strategy, and may also mean that you won t lose track of your super. Three Good Reasons to Consolidate Your Super Accounts 1. Save money on administration fees If you have more than one super account, you may be paying multiple sets of member fees, administration fees, insurance premiums etc. These fees could deplete your super savings. 2. Manage your investment strategy Having your super with many different super providers may dilute your desired investment strategy, which may not only reduce your overall benefit but also require more effort to manage properly. 3. Reduce your paperwork You will receive a single statement that covers all your super information, making it easier to manage your account and avoid a lot of extra paperwork. TIPS AND TRICKS Consolidating is Easy! In most cases you can choose to consolidate your super into any of your existing funds by following these easy steps: Step One: Find out where your super is you will need to gather together the most recent statements for all of your super funds.. If you don t know or are unsure, contact the ATO on or visit the ATO website at for help with tracking it down through the ATO SuperSeeker. This is a free service and all you need is your Tax File Number and a few personal details. Step Two: Complete and sign a Rollover form. This form can be downloaded from your superannuation funds website or you can call Willis Employee Benefits directly on (02) for assistance. Your rollover form also needs to be accompanied by certified identification (such as a drivers licence) and you will need to complete a separate form with separate certifications attached for each of the super funds you wish to consolidate. Step Three: Send your completed form(s) to your current super fund and they ll do the rest! Consider the implications of moving your super, such as: Are there any termination penalties? Are there any investment or taxation implications? Do I have any insurance attached to these Plans? If so, please note that a full transfer will mean closure of your account, including any attached insurances. If you have insurance cover with your existing super fund(s), will you be adequately covered during the transfer process? You may wish to seek advice from the team at Willis Employee Benefits, or from a taxation specialist. and make the most of your super Did you know? 38% of Australians admit to having between two and five super accounts and over 6% said they didn't have the faintest idea how many they actually had. Often your employer s super fund will represent a more cost-effective super arrangement for you, as group discounts and wholesale fees may be available to a group but not to an individual. Frequently, lost super or inactive super member accounts are rolled into an eligible rollover fund, which may be invested in a conservative investment option, such as a cash fund. Page 2

3 are you eligible for $1500 from the government, tax free? For each $1.00 you add as a personal aftertax contribution 1, the Government will cocontribute $1.50, up to a maximum of $1,500, provided you meet the eligibility conditions. Are you eligible? Both employed and self-employed people may be eligible for a super co-contribution. If you can answer YES to all of the questions below, in relation to a financial year, then you should be entitled to a super co-contribution from the Government. Have you made, or are you prepared to make, personal contributions to your super for which you will not claim a tax deduction? 1 Will you earn less than $60,3422 in the 2008/09 financial year before tax (individual income, not household)? Do you earn more than 10% of your total income from being employed 2 or from carrying on a business? Are you under 71 years of age? Have you or will you lodge an income tax return? Are you a permanent resident, or citizen of Australia? 3 Yes How much will you receive? This depends on whether you meet the eligibility conditions, the amount of income you earn and how much you add to your super 4. The following table (right) shows what the Government s co contribution will be based on your own contributions of $1,000, $800, $500 or $200. No If your super contribution is : $1,000 $800 $500 $200 If you earn 5 : The Government will co-contribute : $30,342 or less $1,500 $1,200 $750 $300 $32,342 $1,400 $1,200 $750 $300 $34,342 $1,300 $1,200 $750 $300 $36,342 $1,200 $1,200 $750 $300 $38,342 $1,100 $1,100 $750 $300 $40,342 $1,000 $1,000 $750 $300 $42,342 $900 $900 $750 $300 $44,342 $800 $800 $750 $300 $46,342 $700 $700 $700 $300 $48,342 $600 $600 $600 $300 $50,342 $500 $500 $500 $300 $52,342 $400 $400 $400 $300 $54,342 $300 $300 $300 $300 $56,342 $200 $200 $200 $200 $58,342 $100 $100 $100 $100 $60,342 $0 $0 $0 $0 When will the Government top up your super? If you are eligible and have lodged your annual tax return, the Australian Taxation Office (ATO) will: work out your super co-contribution deposit it into your super account, and send you a letter with details of your super co-contribution. Payments are generally made in November/December each year. How can you participate? To take advantage of the Government s co-contribution scheme, all you need to do is make an after-tax contribution1 to your superannuation account. You can top up your super any time and most fund accept Direct Credit or Bpay through internet or phone banking, or you can send them a cheque. You can also make regular contributions via salary deduction. To organise this, you should speak with your payroll department. 1 Contributions made by your spouse and employer do not count. 2 Eligible employment includes any arrangement where an employer is required to treat a person as an employee for the superannuation guarantee rules. Excludes fully retired people. 3 You are not eligible if you hold a temporary resident visa, for more information visit 4 There is a cap on the amount of after tax contributions you can make without paying higher rates of tax. In 2008/09 the non-concessional cap is $150,000 per year, or $450,000 over three years if you are under age Assessable income and reportable fringe benefits less business deductions (except for super contributions or workrelated expenses) for the 2008/09 financial year. The lower threshold is indexed annually to AWOTE. The upper threshold is $30,000 higher than the lower threshold. Page 3

4 is now a good time to fix your mortgage rate? Views from Mario Borg, Mortgage Advisor at Mortgage Achievers (a Willis Employee Benefits Partnership Services Provider) Is now a good time to fix your mortgage? This is the question on everyone s lips at the moment, at least for those on a variable mortgage rate or for those who are about to move onto a variable rate (from fixed). If you are currently paying variable, my advice is to keep it that way, at least for the time being anyway. Or if you decide to fix and you are certain you won t be breaking your fixed term loan, then fix for the long term of at least 5 years as it s not worth fixing it shorter based on the current market. This is my opinion only so feel free to act on your own intuition. Mortgage industry research over the past 30 years reveals that borrowers on a variable rate were 83% better off than borrowers on a fixed rate. There are many reasons why you would fix your mortgage rate, however speculation is not one of them. This has always been my view. However it can be a sound strategy depending on your own circumstances (e.g. investment loans). Firstly let s look at the Pros and Cons of fixing: PROs Fixed repayments Known cash flow Certainty around household expenses Easier to budget Lower repayments and lower interest cost if interest rates rise CONs No flexibility as you cannot transact your loan account potentially costing you thousands in extra interest Potentially high exist cost if you want to break the fixed term (e.g. you sell your property sooner than planned) Limited extra repayments (usually $10k max per annum) No redraw until the fixed term is over Higher repayments and higher interest cost if rates fall further Factors influencing the fixed rate market Contrary to most people's opinion, fixed rates are not solely influenced by the RBA, in other words don't expect fixed rates to fall if you see a further reduction of the cash rate by the RBA. It just doesn't work that way. Fixed rates are primarily influenced by those investing in the fixed rate wholesale market, whereas variable rate loans are primarily influenced by the cash rate set by the RBA. To demonstrate this we have recently seen banks increase the longer term fixed mortgage rates (3 to 5 years), whereas variable rates did not move at the same time. The question is have the banks got it right? Think about this 12 months ago when banks had everyone believe rates would exceed 10%! Financial analysis to help you decide If you feel right now may be the right time to lock in your mortgage rate, here is a financial analysis we have conducted to help you with your decision. Our analysis relates to the next 5 years and comprises of the following assumptions: A further fall in the variable rate this year by 0.25%, then... An increase of 0.75% in 2010 (3 increases of 0.25% each) An increase of 0.75% in 2011 (3 increases of 0.25% each) An increase of 1.50% in 2012 (3 increases of 0.50% each) An increase of 1.50% in 2013 (3 increases of 0.50% each) An increase of 1.50% in 2014 (3 increases of 0.50% each) The above assumptions have been sourced from a combination of our market intelligence and research from industry experts. The results... On an average mortgage of $350k, you will be marginally better off if you fix your mortgage rate at 5.50% for 3 years right now (this is the current average 3 year fixed rate), and you will be approximately $9k better off if you fix your mortgage rate at 6.20% for 5 years right now (again this is the current average 5 year fixed rate). We have compared this to the current average variable rate most people are paying of 5.10%. The questions to ask yourself are... What if variable rates fall much further and you miss out on further savings in the short term? What if you get it wrong and it ends up costing you more in the long run? What if you could have been paying your mortgage faster by taking advantage of the current low interest rate environment and paying more into your mortgage right now? However, what if our assumptions are wrong and rates increase much steeper and much sooner? The truth is who knows? There can't be a general answer - every borrower has to assess their own situation. My advice is that it's OK to fix so long as you do it for the right reasons and you have a planned strategy. Hopefully the above answers some of your questions right now, or at least help you in your decision making process. If you would like to discuss your particular situation further or you require advice in this regard, please feel free to write to Mario via Willis alliance with this leading edge finance and mortgage intermediary will ensure you source a customised finance package that will save you valuable time and money and help you to achieve a competitive mortgage in today s market. Page 4

5 2009 FEDERAL BUDGET... CONTINUED from page 1 Private health insurance rebate and Medicare levy surcharge From 1 July 2010, the Government will introduce three new Private Health Insurance Tiers, as shown below: Singles $0 - $75,000 $75,001 - $90,000 $90,001 - $120,000 $120,001 + Social Security Increase in Age Pension age The qualifying age for the Age Pension and the Commonwealth Seniors Health Card for men and women will increase to 67 years of age from July The Henry Tax Review report on the retirement income system also recommends aligning the superannuation preservation age with this higher Age Pension age. The qualifying age will begin to increase from July 2017, by six months every two years. Date New Pension age Affects people born between: Current age of those affected 1 July July December to 57 1 July January June to July July December to 54 1 July January 1957 onwards 52.5 or younger Taxation Announced tax cuts from 1 July 2009 In accordance with the tax cuts announced in last year s budget, the new personal income tax thresholds for the year will be as follows: Income Threshold Tax Rate $0 - $6,000 0% $6,001 - $35,000 15% $35,001 - $80,000 30% $80,001 - $180,000 38% $180, % These rates differ from the tax rates for in that the income threshold for the 30% tax rate has been increased from $34,000 to $35,000 and the 40% tax rate has been reduced to 38%. Families $0 - $150,000 $150,001 - $180,000 $180,001 - $240,000 $240,001 + Medicare Levy Surcharge Nil 1.00% 1.25% 1.50% Private Health Insurance Rebate - less than age 65 30% 20% 10% Nil - 65 to 69 years 35% 25% 15% Nil - 70 years plus 40% 30% 20% Nil High income earners will receive a lower tax rebate for their private health insurance premiums. The Medicare levy surcharge will increase for high income earners who opt out of private health insurance. Existing arrangements will remain unchanged for single people with income of less than $75,000 per annum and families with income of less than $150,000 per annum. Family Paid Parental Leave from 1 January 2011 Government-funded paid parental leave will provide 18 weeks of postnatal leave paid at the Federal minimum wage (currently $ per week). Primary carers will be eligible for the scheme if they: have worked continuously with one or more employers for at least 10 of the 13 months before the expected date of birth or adoption have worked at least 330 hours in those 10 months (equivalent to around one full day of work each week) prior to the date of birth or adoption of the child, and have an adjusted taxable income of $150,000 or less in the financial year prior to the birth/adoption of the child. Parents who are eligible for Paid Parental Leave will be able to continue to access employer-funded leave around the time of the birth or adoption of a child. This includes employer-provided maternity leave and recreation leave. Government-funded Paid Parental Leave can be taken in conjunction with, or in addition to, employer-provided paid leave. Paid Parental Leave will be available to contractors, casual workers and the self-employed, many of whom have no access to employer-provided paid parental leave entitlements. In some cases, Paid Parental Leave will be able to be transferred to another caregiver if the primary carer returns to work before the end of the 18-week period. Payments made under the scheme will be taxable. Parents who receive paid parental leave will not receive the Baby Bonus (except in the case of twins or multiple births), or Family Tax Benefit Part B during the 18-week Paid Parental Leave period. Mothers and primary carers not in full-time paid work will continue to receive the current forms of family assistance (including the Baby Bonus) if they meet the relevant eligibility requirements. The Government scheme will be available to parents for births and adoptions that occur on or after 1 January Parents will be able to lodge claims from 1 October CONTINUED on page 6 Page 5

6 2009 FEDERAL BUDGET... CONTINUED from page 5 Reform of Family Payments From 1 July 2009, as a cost reduction measure, the FTB A payment rates will be indexed by the Consumer Price Index (CPI) consistent with other family payment such as FTB-B and the Baby Bonus. Currently the maximum rates of FTB-A for children under the age of 16 are benchmarked to the higher of a proportion of the combined couple rate of pension payments, or CPI. The upper income threshold for FTB-A, FTB-B, dependency tax offsets and the Baby Bonus will remain at its current level until July These thresholds would ordinarily be indexed by CPI. The following upper thresholds will remain: Benefit Type Family Tax Benefit Part B Dependency tax offset Baby Bonus Family Tax Benefit Part A Income purpose Cut off threshold Income of primary income earner $150,000 Income of taxpayer claiming the offset $150,000 Combined family income in the six months following the birth of the child $75,000 Combined family income before losing entitlement $94,316 (plus $3,796 for each additional child) Other First Home Owners Boost (FHOB) extension The Government has announced an extension of the existing first buyers boost for an extra six months until 31 December The boost will be reduced by half for the last three months of the extension period. Purchase of established home Purchase of new home 1 July Sept 09 $7,000 $14,000 1 Oct Dec 09 $3,500 $ 7,000 The FHOB grants are in addition to the existing $7,000 grant under the First Home Owners Scheme. To discuss your personal superannuation situation, talk to Willis Employee Benefits: Betty Vella t: e: Willis Employee Benefits Pty Ltd AFSL Disclaimer While all reasonable skill and care has been taken in the preparation of this document it should not be construed or relied upon as a substitute for financial advice. No warranty or liability is accepted by Willis Employee Benefits Pty Ltd its shareholders, directors, employees, other affiliated companies for any statement, error or omission. Willis Employee Benefits Pty Ltd ABN AFSL Registered Office Level 5, 570 Bourke Street, Melbourne, Victoria, Page 6

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