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The cracker 2009 Federal Budget that fizzled

Debt, Debt and more Debt means less pain…in the short term

By: Gavin Martin
Christian Today Australia Columnist
Tuesday, 26 May 2009, 6:09 (EST)
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Wayne Swan’s budgeted $57.6b deficit (overdraft) next financial year is projected to be followed by 3 subsequent deficits totaling $188b over the next four years. We’ll be paying for this debt for many more years to come.

But the debt, debt and more debt approach of this government has an upside, at least in the short term. The upside is that the pain we were all expecting and prepared for prior to Budget night is significantly less than it could have and perhaps should have been.

The political risk of a tough budget (which this budget was not) at this stage of the political cycle is the unlikely outcome of Kevin Rudd being voted out after just a single term in office. Historically very unlikely.

What this budget delivers is a reprieve from significant short term pain. This creates the risk that the reprieve will be short lived and that in the not too distance future we will have to make the necessary cut backs in order to reduce debt to create a more prosperous, less debt reliant and sustainable future.

So what does the budget mean for you, me and our families?
Single pensioners should be happy to receive a $32.50 a week increase in the pension. Pensioner couples should also be nearly as happy to receive a $10.41 a week increase.

People of age pension age who are still working have previously been able to register for the Pension Bonus Scheme and receive up to $34,814.80 for a single pensioner or $29,077.50 (each) for a couple after working 5 years beyond age pension age. The Pension Bonus Scheme will close to new entrants on the 20th September 2009 and be replaced by another program called the Work Bonus where 50 per cent of the first $500 per fortnight of employment income earned will not count for income test purposes. The Work Bonus is likely to be less beneficial than the Pension Bonus Scheme but despite this the Government hopes it will provide better incentive to remain in the work force.

The proposal to increase the eligible age for the age pension to 67 years, at the rate of 6 months every two years, beginning in 2017 and reaching 67 years in 2023 has been particularly unpopular for those born after 1952. Although unpopular I think it is good policy as the age pension age hasn’t changed in 100 years even though life expectancy has increased by about 20 years. The policy could potentially have a significant impact on many Australians. Let’s hope the outcome is more Australian’s enjoying ongoing engagement in the community through both paid and volunteer work. Not unnecessary pressure on those unable to work due to health or skill reasons as they will need to rely on the lower rate of NewStart Allowance or disability benefits.

First home buyers should pay close attention to the grants available to them over the next year or so as state and federal grants, particularly in Victoria, will change significantly over this period. If you buy a new home in regional Victoria for example you could potentially get access to an even greater grant of $36,500 during July to September 2009. Check out www.firsthome.gove.au to work out the arrangements for your state. Victoria’s State Revenue Office has a useful table at http://www.sro.vic.gov.au/sro/SROWebSite.nsf/rebates_fhog_overview.htm#overviewtable

My caution to first home buyers is to ensure you have sufficient job security, a large enough deposit and sufficient room in your personal or family budget to cope with higher interest rates as these record low interest rates are not going to last forever. Rates of 9% and 10% were a reality just months ago. Also be aware that prices in the first home buyers segment of the market may be inflated. Do your homework before signing!

From 1 July 2009, the generous Government Co-contribution to Superannuation will be temporarily reduced from $1,500 to $1,000 for those who make a non-concessional contribution (that is, an after tax contribution) and have an income below $30,342. From 2012/13 the maximum Co-contribution is expected to increase to $1,250 and return to $1,500 from 2014/15. The co-contribution is still very attractive for those on a lower income with funds available to contribute to super. Click here to learn more about the Government Co-contribution.

Those planning a family will need to wait until 1 July 2011 to receive the 18 week Parental Payment. This will be available to parents earning less than $150,000 pa and will be based on the minimum wage of $543.78. This adds up to just under $10,000. The catch is that eligible mothers will no longer qualify for the $5,000 baby bonus nor family tax payments. Depending on your personal circumstances, including whether your company provides any form of parental payment, you could receive more benefit under the baby bonus and Family Tax Benefit Part B than the parental payment structure.

There is welcomed relief for self funded retirees, most of whom have been significantly impacted by the current economic climate. The minimum pension payable from account based pensions will continue to be halved. This is also potentially beneficial to those receiving utilising a Transition to Retirement strategy.

The drawback for high income earners with a Transition to Retirement Strategy in place is that concessional contributions to superannuation are to be halved commencing 1 July 2009.

Concessional contributions to superannuation are those made to superannuation where a tax deduction is claimed. Such contributions are normally made through the Superannuation Guarantee system, through a salary sacrifice arrangement or by the self-employed. The current limit of $50,000 for those under 50 will halve to $25,000 and for those over 50, the limit of $100,000 will halve to $50,000 for the next 3 tax years. From 1 July 2012 the same limit of $25,000 will then apply to all making concessional contributions. Concessional super contributions work best for those receiving an income over $35,000. Despite the changes, the Transition to Retirement strategy remains a valuable strategy that provides tax benefits in both the short and long term. The change is not expected to impact the majority of working Australians.

One of the most dramatic measures outlined in the budget impacts high income earning employees. Many employees receive company shares as part of an employee share scheme. For executives, this can often represent a significant portion of their remuneration. Currently, employees can elect to pay tax in the year of receipt of the shares or are able to defer the taxation point, where tax is paid at a later date. The ability to defer the taxation point was removed in the budget, having a significant impact on the tax planning ability of the employee. The backlash from employees has been so significant that the Government may reconsider this policy.

Prior to the Budget it was suggested that the Government needed to rein in the “middle class welfare” that gradually expanded during the hay day of the resources boom and property boom in the later years of the Howard and Costello era. But “Howard’s Battlers” have now been termed “Rudd’s Working Families” and as such have largely escaped the pain that many, including Access Economics, believe is required.

Because tax cuts promised during the election are going to proceed, the other initiatives to increase government revenue are less significant and bring about the short term reprieve I mentioned earlier. The “middle class welfare” changes include:

• Reducing the 30% private health insurance rebate. Those with private health insurance currently receive a rebate of 30% on premiums. From 1 July 2010, the extent of the rebate will depend on the level of income received by an individual/family. For single people earning more than $75,001 (couples $150,001), the rebate will reduce to 20%. For single people earning more than $90,001 (couples $180,001) the rebate will be 10%. For singles earning over $120,001 (couples $240,001) no rebate will be provided.

• To ensure the reduction in the 30% private health insurance rebate does not result in people relying on the struggling public health system the government will increase the Medicare levy surcharge. A single person who does not have private health insurance and has an income over $70,000 (couples $140,000) currently pays an extra 1% Medicare levy surcharge. From 1 July 2010, the surcharge will increase to 1.25% for singles earning more than $90,001 (couples $180,001), and 1.5% for singles earning more than $120,001 (couples $240,000). These changes are expected to affect around 10% of the population.

• Family Payments including the Family Tax Benefits Part A and Part B and the Baby Bonus will maintained at current levels for three years. The pain has been deferred by capping future increases rather than making immediate cuts.

The Government has argued that there is no realistic alternative to the Federal Government going into billions of dollars of debt.

Nevertheless, this budget will be known as the cracker budget that plunged Australia into debt and turned into a real fizzer when the burden of long term debt and the resulting interest payments are borne over the next decade or decades. Enjoy the reprieve while you can. Or better still, pay off debt, increase savings and help those around you doing it tougher than you are.

Gavin Martin is a Financial Adviser, Managing Director of Cornerstone Wealth and founder of www.mastermymoney.com.au

Disclaimer
This article does not take into account the personal objectives, financial situation or needs of any person. You should consider the appropriateness of the information having regard to your own objectives, financial situation and needs and obtain professional financial advice prior to making any decision.


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