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Federal Budget 2021 -22 for Pre and Post Retirement

Federal Budget 2021 -22 for Pre and Post Retirement

Federal budget 2021

Recently a new 2021-22 Federal Budget was announced as a continuation of tax relief for lower earners, help for older Australians to save for retirement, and more assistance for first home buyers.

At this point in time, those are proposals only and all recommendations need to pass as legislation through the parliament to apply.

So let’s brainstorm those recommended changes and check which ones are for your benefit and which might look good on a surface, but in actual fact, are to your detriment.

·         TAXATION

The government has not introduced anything new or exciting in this area, the majority of proposals are repeated from last year’s budget. This is my article about the changes from the 2020-21 Budget, and now let’s see what is new:

1.     Low and Middle Income Tax Offset (LMITO)

Just like last year, the government wants to extend the Low and Middle Income Tax Offset (LMITO), so it will apply for 2021-22. It is worth up to $1,080 for an individual or $2,160 for a couple.

federal budget 2021-2022 table 1

2.     The Low Income Tax Offset (LITO)

It will apply as follows:

Federal Budget 2021 -22  for Pre and Post Retirement

3.     Tax rates

As per recommendation in the 2020-21 budget, the government is continuing their recommendation of personal income tax rates to be simplified to 3 stages only from 1st July 2024

Federal Budget 2021 -22  for Pre and Post Retirement
4.     Update of the individual tax residency rules:

In order to determine your tax residency, the ATO will apply:

test 1 – physical presence in Australia for 183 days or more – if you meet this test, you are an Australian resident for tax purposes, if you do not

test 2 – ATO will apply the second test, going over your specific personal circumstances.

5.     Medicare Levy Low-Income Threshold

from 1st July 2020 – 21 financial year the threshold will be extended, therefore you will not pay Medicare if your income is as follows:

federal budget table 4

Changes recommended within the tax environment are nothing new, but it is good to see extension of the LMITO for the next financial year.

·         SUPERANNUATION

  1. Work Test

Currently if you are aged 67 – 74, in order to make super contributions, you need to meet work test, which requires you to work at least 40 hours over 30 consecutive days in the financial year.

The proposal is to remove work test requirement. If passed through the parliament, you will be able to make non-concessional contributions (so your voluntary contributions) as well as salary sacrifice contributions to your super fund, without the need to meet the work test.

However, if you wish to make personal deductible contributions, so contributions for which you wish to make personally tax deduction, the work test will continue to be mandatory.

Obviously, you need to stay within the contribution limits. If you are unsure about how those limits work, review this article: Reduce tax through super. How much can you contribute?

Removal of Work Test could introduce many extra opportunities for you to make additional contributions to superannuation which in turn can become your main source of your retirement income, which could be very beneficial for you and it is proposed to be effective from 1st July 2022.

2.     Downsizer contributions

This could be a great benefit for many retirees, as I have always been saying that the downsizer contribution was a great initiative, however the age restriction was far too great for many to benefit.

Now the government is considering reducing the age from 65 to 60 that you are able to make tax-free contributions to your super from the proceeds of selling your family home. Other eligibility rules remain unchanged.

This is a good measure that could benefit many retirees to improve their retirement living standard by downsizing and utilizing the surplus for income purpose.

3.     No change to legislated Superannuation Guarantee increase

The government is not changing the legislated increase in Super Guarantee (SG). from 1st July 2021 it will increase to 10% gradually increasing by 05% each year to 12% in 4 years.

federal budget table 5

4.     Removal of $450pm threshold for SGC

This one measure will have a big impact on many part-time workers and people working several jobs. Majority of such workforce are women, so this will help to improve retirement savings.

5.     Giving retirees opportunity to exit Legacy retirement product

Retirees with certain income streams commenced many years ago (legacy products) will have a two-year period to exit those products.

What that means is that this proposal if approved, will allow you to move your total available balance back to the accumulation phase of superannuation and then decide what to do with funds.

Currently you might have restrictions in those products, you may have no access to funds, you might be restricted with withdrawals or the level of income earned. So the official idea behind this measure is to provide you with ability to use those funds and use them in more modern, more flexible retirement products.

Immediately, a huge, huge word of caution, DO NOT, and I repeat, DO NOT take up this opportunity and close your old existing products without proper advice. You can suffer so much financial loss, and once you have taken your money out of the existing product, there is no turning back.

You might be wondering why I am so very definite about it? you might be wondering what is the big deal? After all you might have access to funds that were stuck in some product many years ago, with no ability to spend it outside of the periodical income received.

I will give you several reasons why you need to check this option, before you decide to exit the product:

  • tax – many of those old products could be providing your with an income that has many tax advantages, which could change when taken out. Also, if you move those funds back to super, although that amount will not be counted towards your concessional cap, it will be taxed as an assessable contributions of the fund with a 15% tax rate.
  • level of income earned – if you have money invested through old-fashioned annuities, some of them can be providing an income based on cash rate from all those many years ago – 10 or even 15% return, you will never get that level of guaranteed return now, so it does need to be checked
  • Age Pension – this is a big one – I repeat, you need to check benefits of your existing product before deciding to withdraw any funds, just because you can. Some products could provide 100% or 50% asset exemption form Assets Test. If you take money out, you could damage your Centrelink entitlement and never get it back. Other products that are “grandfathered” under the old legislation could provide portion of your income to be exempt under Income Test, those products are no longer available and just like previously mentioned, they are gold in your arsenal of investments for optimising your Age Pension entitlement.

So, I repeat again and again, speak to a specialist financial planner, or let’s call it what it is, retirement planner, who has been around long enough to know and remember those old products and what benefits they provide to you.

I guess there might be a handful of people who will benefit from this initiative, but for most this could be a disaster waiting to happen, so please speak to a professional. If you do not have a financial planner that specialises in the area of retirement planning or has not been around for long enough to remember those products (OMG I make myself appear old now), please feel free to contact me to have a chat and confirm your best options.

6.     First Home Super Saver Scheme (FHSSS)

The government will increase the maximum amount that could be released from super for the purpose of buying your first home from $30,000 up to $50,000 from your voluntary concessional and non-concessional contributions.

Contributions that will be counted for your eligible limit are your voluntary contributions made from 1st July 2017 with annual limit of $15,000.

·         SOCIAL SECURITY

Pension Loan Schemes

The government is introducing a “No Negative Equity” guarantee, which means that borrowers will never owe more than the value of their equity in the property the loan is secured against.

There will be two lump sum advances in any 12 months up to 50% of the maximum annual rate of Age Pension, which means that a single person could receive a lump sum payment up to $12,385 each year and couples up to $18,670 each year.

this is a way, how you can improve your cashflow using your family home as a loan security without actually selling your home. This loan is getting repaid when the property is sold or the pensioner dies.

·         AGED CARE

In response to Royal Commission into Aged Care Quality and Safety, the Government announced a 17.7 billion 5 pillar aged care reform plan.

Most people do not want to end up in Aged Care facility, and government has finally recognised it. Therefore new funding has been provided for home services such as:

  • additional 80,000 home care packages – half in 2021-22 and the other half the following year, which will make a total of 275,598 home care packages by June 2023.
  • additional respite care services and payments to support informal carers
  • improve support and services for seniors to navigate the Aged Care system.

As you can see, there are many positive initiatives and few you must be very wary about, but in all, it appears to be a positive and supportive budget.

By: Katherine Isbrandt CFP®
Money Strategist & Retirement Planner
Principal of About Retirement

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