13 May 2015
Budget Highlights 2015-16
The federal budget revealed a balance of spending and savings measures, with the government spending almost all the money expected to be saved in order to stimulate the economy and drive growth through jobs. The budget announcements are expected to improve the bottom line by $1.6 billion over the forecast 5 year period to 2018-19, with the expectation of a return to surplus now being 2021 at the earliest.
The biggest spending measures will be on families and small business with some $10 billion being spent on these packages. On the savings side of the equation, the changes announced to aged and other pensions are some of the biggest individual savings items to the budget, with an estimated $2.4 billion in savings over the next 5 years.
As anticipated, a number of the Government’s announcements from last year’s budget are no longer scheduled to go ahead, either being taken off the table completely or replaced with alternative policies. The Treasurer, Joe Hockey made a clear and welcome statement that there will be no changes to superannuation taxation during the remaining term of this Government.
While there are many aspects to the budget announcements, this article focuses on the changes announced for social security and pension entitlements. It’s important to remember that these are announcements only at this stage and are not yet law.
The budget deficit will reduce from $41.1 billion in 2014-15 to $35.1 billion (2.1% of GDP) in 2015-16. The budget deficit will further reduce to $6.9 billion (0.4% of GDP) in 2018-19.
- Real GDP growth of 2.75% for 2015-16 is projected to increase to 3.25% for 2016-17
- The unemployment rate is expected to peak in 2015-16 at 6.5%, and then decline
- CPI growth of 2.5% was announced for 2015-16 and 2016-17
Key changes to Social Security rules
Assets test threshold
Starting from January 2017, there are proposed changes to the asset test thresholds and taper rate that will benefit some, but will negatively impact others.
The first change will see the lower assets test threshold, where the rate of pension starts to reduce once assets reach a certain level, increase from $285,500 to $375,000 for couples owning their home. The thresholds also change for non-home owners and single retirees. This change is expected to see an extra 50,000 retirees now qualify for a full pension rather than a part pension.
The second change will see the taper rate reduce the amount of pension someone is entitled to from $1.50 per $1,000 of assets over the low assets test threshold, to $3.00 per $1,000. The implication of the higher taper rate is that pension entitlements will phase out much quicker and no pension will be available when assets reach $823,000 compared to the current $1.15 million for a couple owning their own home. There are similar results for single people and non-home owners. As a result of these changes, about 91,000 people are expected to lose entitlement to any pension.
While there are changes at the upper and lower end of the thresholds, more than 90% of pensioners (3.7 million pensioners and other Australians who receive pension linked payments) will either be better off or have no change to their arrangements.
The table below sets out the current and proposed thresholds for singles and couples, homeowners and non-homeowners.
|Status||Current Lower Threshold||2017 Lower Threshold||Current Upper Threshold||2017 Upper Treshold|
- Couples who own their own home and have additional assets of less than $451,500 may receive a higher pension.
- Couples who don’t own their own home and have asset holdings up to $699,000 may also be better off from January 2017.
- For singles, the asset thresholds are $289,500 for home owners and $537,000 for non-homeowners – this means those whose additional asset holdings fall below these levels will receive a higher pension.
The Government will reduce the maximum value of assets (excluding the family home) you can hold to qualify for a part pension.
- For single homeowners, this maximum value will be reduced from $775,500 to $547,000.
- For couple homeowners, this maximum value will be reduced from $1,151,500 to $823,000
The Government has announced that anyone who loses their pension entitlements on 1 January 2017 as a result of these changes will automatically be issued with a Commonwealth Seniors Health Care Card (CSHC) or the Health Care Card (HCC) for those under Age Pension age.
Defined benefit pensions
From January 2016, Centrelink pension eligibility is also scheduled to change for those who have public sector and corporate defined benefit pensions. In determining eligibility for Centrelink pensions, the amount that is excluded from the income test, being the deductible amount, is scheduled to be reduced to a maximum of 10%. Currently, deductible amounts can be as high as 50%.
This change may reduce the amount of pension entitlement for some people.
The following example helps to show how these changes will work:
Lillian is a single age pensioner receiving an $80,000 p.a. defined benefit pension which has a 50% tax free component i.e. $40,000. She has no other income. In determining her age pension eligibility, the tax free component (or the deductible amount) is not counted under the income test, which means only half of her income is assessed and she eligible for an age pension of $4,445 p.a.
From 1 January 2016, the deductible amount is now limited to a maximum of 10% or $8,000, meaning that $72,000 of her pension will be counted under the income test and as a result, eligibility for the age pension will be lost.
There are some defined benefit pensions that are likely to be exempt from this change, being the recipients of Veterans' Affairs pensions and/or defined benefit income streams paid by military superannuation funds.
The Government announced that the intention of this measure is to ensure a fairer amount of income received from a defined benefit income stream is subject to the income test for the pension.
Keeping up with the cost of living
In addition the Government announced it will not proceed with last year’s budget measure to index pensions by the consumer price index (CPI) only. This means the age pension will continue to increase at the highest available indexation rate, to help pensioners keep up with the cost of living.
Improving access to medicines
The Government reaffirmed its commitment to maintaining affordable access to medicines through the Pharmaceutical Benefits Scheme. The proposal will reduce the cost of some medicines by up to half.
Good news for small businesses
The most exciting news for small businesses is a $5.5 billion Jobs and Small Business Package that will provide tax relief measures to encourage investment and jobs creation. From 1 July 2015, incorporated small businesses will receive a tax cut of 1.5%, to 28.5%. Also included in the package, unincorporated small businesses will receive a 5% tax discount on income delivered as a tax offset, capped at $1,000 p.a. per individual.
In addition small businesses will be able to immediately deduct assets costing less than $20,000 that they buy until 30 June 2017.
Many retirees will see changes to their Centrelink benefits if these proposals become law. In a period of historically low interest rates, any reduction in pension benefits may require retirees to draw down on their capital in order to live comfortably. At your next review, your financial planner will show you how to manage your investments so that you are able to balance your immediate income needs with your long term security requirements.
Your financial planner will consider the implications of the Budget 2015-16 changes at your next financial review.