Monday, May 19, 2014

Budget hits pensioners and mature-age workers

Payments are more tightly targeted to those in most need

Pensioners, mature-age workers and self-funded retirees will be stung sooner than expected by the budget.

Those eligible for the part pension from next January will be hit by an effective 50 per cent tax as super payments are included in both means tests, financial advisers warn.

Worse, after July 1 this year those on concession cards which are available to pensioners could lose as much as $2000 a year, says Louise Biti, head of technical services at Strategy Steps, which advises financial planners.

The pension concession and Commonwealth Seniors Health cards offer travel, electricity, phone and council rate discounts in an agreement with the states.

But buried in the budget documents the government reveals it will be "terminating" this agreement after July 1, saving  $1.3 billion over four years.

"It will hurt pensioners the most. This will cost $1000 to $2000 a year. No one was expecting that. Since it's not a direct payment to pensioners the government didn't want to highlight this," Biti says.

The separate abolition on September 20 of the "seniors supplement" attached to the Seniors Health card for self-funded retirees will cost couples $1320 a year.

But the biggest sting is the government's decision to count super drawdowns as part of the assets test from next January.

This will bring super into the deeming net where it is assumed to earn a certain return, as is the case for term deposits and other financial investments.

Currently super pension income is adjusted by dividing the balance by the pensioner’s life expectancy.

Under deeming, super will be simultaneously caught by both the assets and income tests.

For example, a 65-year-old with $250,000 in super on the full pension would, after January 1, be assessed as earning $8284, which is above the $7176 income threshold. Every dollar earned above $7176 would lose 50 cents of pension.

In a double whammy, you lose some of the pension to begin with, then another 50 cents in every dollar you earn if you keep a part-time job, financial planner Paul Moran, principal of Moran Howlett Financial Planning, says.

“Under the assets test you could work part-time to use up the income test threshold but now if you have a super pension you’ll lose half. The change amounts to a new tax of 50 per cent for many existing and soon-to-be pensioners and veterans. It’s a huge hit,” Moran says.

It will hit even harder in 2017 when deeming starts with balances of $30,000 (or $50,000 for couples) instead of the current $46,600/$77,400.

Those getting the age pension before December 31 will be exempted from the new super deeming rule. But this will also discourage anybody over 65 from remaining in the workforce, at the risk of being caught in the new rules from next year.

“There’s an incentive to retire if you reach 65 this year. Or you could resign, go on the pension and then go back to work part-time and start a super payment so long as you do it before December 31,” Moran says.

“These are not wealthy people. So getting $100 less a fortnight is very material to them,” he adds.

In another budget hit, the mature age worker’s tax offset for those in the workforce aged over 55 and earning less than $63,000 a year will be scrapped on July 1.

Although this will pay for the new $10,000 subsidy to employers for hiring older workers who had been on the dole for six months, Biti warns this could backfire.

“A boss might sack you and hire somebody else and get the $10,000,” she says.

Other budget booby traps include:

The fringe benefits tax rising to 49 per cent for those earning over $180,000 paying the deficit levy.

The franking credit from dividends drops from 30 to 28.5 per cent after July 1, 2015.

A freeze on the thresholds for the private health insurance rebate and Medicare levy surcharge from July 1, 2015. This will reduce the value of the rebate for some and push others into the surcharge as wages rise.

The abolition of the twice-yearly income support bonus on Centrelink and Veterans’ Affairs payments.

The abolition of the dependent spouse tax offset from July 1.

One piece of good news that has escaped notice is Treasurer Joe Hockey’s claim that households will save “on average around $550 next year alone” from the abolition of the carbon tax.

And while the Medicare levy rises to 2 per cent on July 1, it appears the higher tax-free threshold of $19,400 due to start on July 1, 2015 has also been spared the axe.


Kev can’t waffle his way out of this

THOSE Labor people, including Kevin Rudd, who insist the “pink batts” royal commission is a political stunt, should just listen to the heartbreaking testimony of the victims’ families.

Four young men lost their lives in the ill-conceived, foolish $3 billion green scheme Rudd rushed into action as part of an economic stimulus package during the Global Financial Crisis.

Insulation installers Matthew Fuller, Rueben Barnes, Mitchell Sweeney and Marcus Wilson are the human toll of political naiveté and fakery.

Their grieving families took the witness box last week, to thank the commission for trying to discover the truth about the deaths, the fires, the electrified roofs - and make sure it never happens again.

They also thanked Kevin Fuller, whose only child, Matthew, 25, became the first installer to be electrocuted in a roof cavity, on October 14, 2009; without his perseverance the commission never would have happened.

Fuller said he was driven by guilt that three young men had died after Matthew, and his googled discovery that metal staples had been banned in New Zealand after similar tragedies.

“I expected the system would get off its a**e and go and … change things and make stuff happen. Nobody did. Nobody. They all just allowed Rueben to get killed. And what that did to us was kill us, because we had talked to them all between Matt and Rueben and said, ‘Do something. This has got to stop’.”

Martin Sweeney, the father of Mitchell, 22, the fourth installer to die, on February 4, 2010, also gave heart-rending testimony on Thursday. “We love you very much, Mitchell, and we haven’t stopped missing you,” he said.

Then, as he left the stand, head bowed, shoulders slumped, Kevin Rudd flounced in. The two men passed within centimetres of each other, but Rudd did not even glance at the grieving father.
In the witness box, Rudd, who had jetted in from the US, was soon expounding on his brilliance during the GST. He had a “helicopter view”, busy busy busy, never troubled by details of a scheme which set of a frenzy of unregulated activity which led to the deaths of young men electrocuted in roof cavities while installing pink batts.

Rudd was insufferable from 9.05am to 5.28pm. He waffled and filibustered, preened and boasted. His smugness and grandiloquence escalated as the day dragged on.

“I have no particular familiarity with that,” he kept saying. He used five words when one would do, dealt in the abstract when asked for specifics, used strange idioms, jargon and impenetrable bureaucratese, as if he were so clever he spoke at a level mere mortals could not understand.

One example: “I think what I would say in response to that is, as prime minister, once a decision is taken to implement a program that all its downstream administrative requirements, in terms of adequate training, adequate preparation for the adherence to the laws which exist, are then made.”

The pretentious blather was infuriating. Obfuscation from a disorderly mind. Language employed to obscure thought.

One frustrated lawyer snapped: “Mr Rudd … please, just concentrate.”

As the day wore on, it became clear that Rudd’s language may be key to the dysfunction that led the nation to catastrophe.

George Orwell warned long ago of language which corrupts thought and leads to political chaos. Pity no one in Labor listened.

By the end of that exhausting day, even Rudd’s own barrister had his head in his hands. If you looked around the room at 3pm, you would have seen the body language of boredom or disbelief at the spectacle in the witness box, still blithely blabbing away.

A climax of sorts came when Elizabeth Wilson, acting for Rueben Barnes’ sister, pressed Rudd on what was done in the month between Matthew and Rueben’s deaths.

“If we can just focus on what you did after becoming aware of Matthew Fuller’s death; did you … proactively go and say, ‘Listen, I want all the advice on any safety issue with the scheme?’,” she asked.

Rudd waffles. Wilson persists: “After my client’s brother’s death, after Rueben’s death, did you ever consider suspending the program, pending a full safety audit?”

Rudd: “That advice was not put to me, to the best of my knowledge.”

Wilson: “But, Mr Rudd, did you consider suspending the program, pending a full safety audit? “

Rudd: “…the position in which I found myself was to take advice from the portfolio minister responsible and the public servants advising me.”

Blah blah blah. Rudd as prime minister, a mere receptacle for “advice”.

Who knows what the commission will conclude. But to the families, it’s obvious where the fault lies.

“(The insulation companies) chose to run their business badly in order to make a quick buck,” Rueben Barnes’ sister Sunny told the inquiry. “However, the option to run it in this way … was there, thanks to the Commonwealth Government.”

Thanks to Kevin Rudd.


Milllion-plus university students face increased costs for tertiary education

More than a million university students and former students would face extra charges, some in the tens of thousands of dollars, according to a Fairfax Media analysis of the planned move to impose higher interest on their fees.

And the likelihood students will be saddled with extra payments from interest rates of up to 6 per cent has increased after Palmer United Party leader Clive Palmer softened his opposition to the measure.

''We've got to see how we can have a win-win situation for Australia and Australian students,'' Mr Palmer, whose party will hold the balance of power in the Senate from July, said. ''I do think our universities could be a great export for Australia.''

The Abbott government plans to allow universities to set their own fees, and will lower the income threshold for students to repay their debts and apply real interest to student loans for the first time.

The changes have split the tertiary sector. Elite universities are strongly in support while many technical, suburban and regional universities are opposed. Under the changes, it is predicted the price of some degrees could rise to $120,000.

Interest has not been applied to student loans since the introduction of HECS in 1989; debts are pegged only to inflation (now 2.9 per cent).

From 2016, debts will be indexed to the 10-year treasury bond rate, capped at 6 per cent. The change will affect everyone with student debt, with no exemptions for former students who still owe money. There were 1.175 million Australians with outstanding HELP debts in 2012, according to Tax Office data.

A $60,000 student debt, unpaid for 10 years, would grow to $97,734 at an interest rate of 5 per cent. The Treasury bond rate, now 3.8 per cent, can fluctuate dramatically and has averaged 5.2 per cent over the past decade.

Before the election, Mr Palmer said high tertiary fees were holding the country back. ''We need Australia's cleverest people taking themselves and this great nation forward, not burying them under a mountain of debt,'' he said. But the mining magnate now says he is open to Christopher Pyne's changes.

Mr Palmer, who has had a fractious relationship with Coalition MPs including Prime Minister Tony Abbott, said he would make his decision based on the national interest.

But he acknowledged he had a good relationship with the Education Minister, whom the Prime Minister has asked to manage all government communication with Mr Palmer. ''I've known Christopher Pyne a long time,'' Mr Palmer said. ''He's a very entertaining member of parliament.''

Asked about his confidence in negotiations with the powerful and unpredictable MP, Mr Pyne said: ''I am certain I can work with Clive Palmer to bring about reform to higher education.''

With Labor and the Greens opposed to the changes, the government will need the support of the three Palmer United Party senators, PUP ally Ricky Muir and two other crossbench senators to pass its higher education package. With two senators-elect supporting Mr Pyne - Liberal Democrat David Leyonhjelm and Family First's Bob Day - the success of the changes will be decided by Mr Palmer.

The architect of the HECS repayment system, Bruce Chapman, called for the government to rethink its policy, describing it as unfair and ''bad economics''.

''Past changes to HECS didn't deter students, but now there will be a real rate of interest on the debt we are in uncharted waters,'' he said.

A spokesman for Mr Pyne said: ''Changing the interest rate to match the rate government has to pay is fair for taxpayers and fair for students.''


Revenue to the rescue

For all its rhetorical emphasis on expenditure restraint, the 2014-15 budget in fact relies heavily on revenue to reach approximate balance in four years' time. Total annual revenue is up by a very robust 29% over those four years. This largely takes the form of automatic revenue growth (including personal income tax bracket creep) which always occurs when the economy is growing.

However revenue is set to grow faster than the economy, thereby lifting its share from 23% to 25%, a level that has not been exceeded since the boom years of the 'noughties' (and even then not by much). The fiscal experts who keep telling us the budget is in strife because there isn't enough revenue should throw away their song-sheet.

As well as raking in strong automatic revenue growth, the government has chosen to put some icing on its cake by hiking the top marginal rate of personal income tax and reinstating indexation of fuel excise for inflation.

Such measures will make about one-quarter of the deficit-shrinking discretionary policy effort (as distinct from the automatic revenue and expenditure changes) over the next four years - and less by the end, if the income tax hike is indeed only temporary as claimed.

While this makes a welcome change from the previous government's heavier emphasis on revenue measures, it is still disappointing that the current government has seen fit to resort to increased revenue to the extent it has. The more a government relies on tax increases, the more it is telling us it wants to sustain big government rather than reduce it.

The revenue-boosting measures are ad hoc rather than anything that deserves to be called 'reform'. The hike in the top income tax rate, in particular, reverses some of the decades-long downward trend in marginal rates. It will ratchet up the incentive for high earners to hone their tax-minimisation skills, and ratchet down the incentive for them to do more productive things.

While much of the talk about broken promises is sanctimonious, in tax matters the government should have stuck to its pre-election script and left any changes until after its tax system review.


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