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From paying less tax to getting more from your super, find out what the recent 2018 Federal Budget announcement has in store for younger Australians.
Tax relief that puts more money in your pocket might seem like the biggest win for your finances following the Federal Budget announcement on 8 May. But while a boost to your income is always welcome, a closer look at some of the superannuation changes proposed by the government could mean many young people getting better value from their super.
Here’s a quick guide to 18/19 budget highlights that could be important for your finances and lifestyle now, and for the longer term:
A tax windfall in the next financial year
Tax relief can often be a focus for Federal Budgets when a government is closing fast on the next election. So we shouldn’t be surprised that the first budget measure to be announced was a seven-year program of tax changes, aimed at making making personal income tax “lower, fairer and simpler1.” But it may be the case that these reforms are more in response to slow wage growth in Australia in recent times2, rather than a bid to get in the good books with voters.
Low and middle income earners will be the first to benefit in the next financial year. A low income tax offset will be available to workers earning up to $125,333 for 2018/19 and for the three years following. People earning between $48,000 and $90,000 per year will get the maximum benefit of $530, received as a lump sum after they lodge their tax return. Those with a taxable income of $37,000 or less will receive up to $200 from the change and the value of the offset increases at a rate of three cents per dollar up to a maximum of $530 for incomes between $37,000 and $48,0003.
The other two steps in the tax program are focused on raising and simplifying tax brackets with changes being phased in from 1 July 2018 to 1 July 2024. According to government estimates, by 2024/25 a maximum marginal rate of 32.5% will apply to 94% of taxpayers, compared with 63% without these changes4.
Committing to future savings
It might be frustrating to have to wait until the end of next financial year to benefit from the new tax offset. But being able to plan on a windfall could give you a better chance of saving it, rather than just adding those few dollars a week to your cash flow. In her book, Mind Over Money: The Psychology of Money and How To Use it Better, psychologist Claudia Hammond, tells us how making ourselves a promise to save a future pay rise or bonus can boost our chances of following through. “Committing to that sacrifice in the future, when you imagine yourself having more to spare is much less difficult,” she says.
Simple ways to save more super
If your super savings are just getting started, your balance could be getting a boost without you having to lift a finger. Proposed changes to superannuation include a 3% cap on passive fees for accounts with balances less than $6,0005. And if you decide to change to a different super fund, your current fund can no longer charge you exit fees. The government plans to introduce both these changes from 1 July 2019 and they should go some way towards reducing the fee burden on super savings for young people.
When your super savings are spread around a number of accounts, you’re also likely to be paying more in fees than you need to. Another change proposed is for all super accounts with a balance below $6,000 to be transferred to the ATO6. This measure should give account holders a better chance of having all their super consolidated in fewer accounts, potentially leading to further savings in fees.
Save on unwanted premiums, but stay protected
Another measure that will have an impact on accounts with low balances relates to the insurance policies that are often bundled with super accounts. Paying premiums for personal insurance, such as life or total and permanent disability (TPD) cover, through your super can bring important protection for you and your family’s financial well being. This approach can also save you from having to pay for the policy from your disposable income.
But it may be the case that you’re paying for a policy through your super and you’re not even aware of it. The type or level of cover you’re getting may not be right for you or you may have arranged a separate insurance policy. Or you might not even be convinced you need personal insurance. Under proposed changes, from 1 July 2019, super account holders who are under 25, have a balance of less than $6,000 or have an account that has not received contributions for 13 months, will have to opt-in for their insurance. From this date, people who fall into one of these groups will have 14 months to choose to keep their current insurance policy or allow it to lapse by default7.
While all these changes are intended to keep more of an account holder’s super savings in their fund and earning a return, they may end up risking more than they’ve saved if they forego insurance cover altogether. “The insurance measures — and potentially the fee cap, when applicable – will have the potential to significantly reduce the depletion of young members’ balances,” says Dimitri Diamantes, Policy Manager for the FPA. “On the other hand, if these members suffer an insurable event, they may not be covered. “
FPA CEO, Dante De Gori shares these concerns about the potential risks and consequences for people who don’t opt-in. “This decision must be an informed one,” says Mr De Gori. “Young Australians should be aware of the consequences of deciding to not opt in. For example, insurance is easier to get when you are younger and is more affordable. So before you decide to opt out of insurance, do your research and seek advice8.”
1 FPA Media Release, Budget 2018: A focus on minor adjustments, rather than sweeping reforms, 8 May 2018, “Aimed at making personal income tax “lower, fairer and simpler”, the Government’s seven-year Personal Income Tax Plan means more Australians will benefit from lower rates of tax.”
2 FPA Media Release, Budget 2018: A focus on minor adjustments, rather than sweeping reforms, 8 May 2018, “The reality of low wage inflation over recent years has prompted the Government to act in a manner that returns disposable income to people’s pockets.”
4 Budget 2018-19, “The plan means that around 94 per cent of all taxpayers are projected to face a marginal tax rate of 32.5 per cent or less in 2024-25. This compares with a projected 63 per cent of taxpayers in 2024-25 without change to current settings.”