Now that the dust is starting to settle on last week’s Federal Budget, here is a summary of the five immediate financial changes that will impact retirees, investors and SMSF members. All changes will take effect from 1 July 2019. 

1.      Pensioners will be able to earn more before it hurts their pension

If you are one of the 88,000 aged pensioners who works part time, or perhaps a pensioner who wants to work part time, you will be able to earn more before this starts to affect your government pension. The Pension Work Bonus will be increased from $250 per fortnight to $300 per fortnight. When this is added to the $168 income free area, a single pensioner could potentially earn $468 per fortnight ($12,168 pa) and still receive the maximum government aged pension.

Eligibility is also being extended to earnings from self-employment, although a ‘personal exertion’ test will apply. Unused amounts of the work bonus can be carried forward up to a maximum of $7,800.

Because the pensioner income test reduces the fortnightly pension by $0.50 for every $1.00 of income over the income free area (plus work bonus), some pensioners will receive a higher part-rate pension. For example, if Tom earns $600 a fortnight, his part pension will increase by $25 per fortnight.

2.      Government Reverse Mortgage (Pension Loans Scheme available to all retirees)

All Australians of age pension age (67 years or older if born after 1 January 1957) will be able to access the Pension Loans Scheme to boost their retirement income. This is effectively a Government run reverse mortgage scheme. Eligibility is being extended to include self-funded retirees and the payments available are being increased.  

The maximum amount that can be “borrowed” (received as a regular payment from the Government) is for a single person $11,799 pa ($453.81 per fortnight). For a couple, it is $17,787 pa ($684.11 per fortnight). The actual loan size (payment) will depend on the age of the recipient(s) and the value of their home.

As a reverse mortgage, the loan will be secured by a charge over the retiree’s/pensioner’s residential property. Upon death, the home will be sold and the proceeds used to re-pay the outstanding loan balance. Interest is charged on the outstanding loan balance at a rate of 5.25% pa and is capitalised.

Payments are made each fortnight, usually accompanying the regular pension payment. Lump sum withdrawals (loan amounts) are not permitted. On the other side of the ledger, recipients can repay their loan in part or full at any time without penalty.

From a cost point of view, it is relatively attractive with the interest rate about 1% lower than commercial reverse mortgage schemes. There are also no monthly account fees.

Let’s take an example to demonstrate how the Pension Loans Scheme works.

Bob and Sue are a 70 year old maximum rate pensioner couple, with a house valued at $850,000. Their combined Age Pension income is currently $1,368.20 per fortnight ($35,573 per year).

They decide to boost their income and access the Pension Loans Scheme. They choose to receive the maximum amount available of $684.11 which takes their total fortnightly payment (pension plus loan scheme amount) to $2,052 per fortnight ($53,360 per year). This income stream increases over time in line with inflation.

Over the next 20 years, Bob and Sue receive around $500,000 in additional income to support their standard of living in retirement.

After 20 years, Bob and Jane sell their house for $1.6 million. The value of the outstanding loan, which has accrued interest at a rate of 5.25% pa, has grown to around $900,000. Bob and Sue pay out this balance from the sale proceeds and retain $700,000.

3.      An extra year to contribute to super

Currently, if you are over 65 years and under 75 years, you need to pass the ‘work test’ in order to make contributions to super. The test is defined as working a minimum of 40 hours in any 30 day consecutive period in the financial year – so it is like working full time for a week or one day a week for a month. Not that hard, but still a test to pass.

Of course, if you are under age 65 you can make super contributions whether working or not, and if you are 75 or older, you are restricted to just your employer’s mandated 9.5%.

From 1 July 19, people aged 65 to 74 with a total superannuation balance below $300,000 will be able to make voluntary contributions for 12 months from the end of the financial year in which they last met the work test. They will potentially be able to access their non-concessional cap of $100,000 for personal contributions, and their concessional cap of $25,000 for contributions they could claim a tax deduction for. They will also be able to access any unused concessional cap space under the new 5 year ‘carry forward’ rules.

4.      SMFS’s will only need to be audited every three years

The Government will change the annual audit requirement to a three-yearly requirement for self-managed superannuation funds (SMSFs) with a history of good record-keeping and compliance. This measure will reduce red tape for SMSF trustees that have a history of three consecutive years of clear audit reports and that have lodged the fund’s annual returns in a timely manner.

Another positive, particularly for larger families, is that the maximum number of allowable members in new and existing self-managed superannuation funds and small APRA funds will be increased from four to six members from 1 July 19.

5.      No tax deductions on vacant land

And perhaps the only negative is the axing of tax deductions for holding vacant land. From 1 July 19, the Government will deny deductions for expenses associated with holding vacant land such as interest costs or council rates.

Deductions will still be available if the expense has been incurred after a property has been constructed on the land, it has received approval to be occupied and is available for rent or if the land is being used by the owner to carry on a business, including a business of primary production.

The measure is expected to save the Government $25m pa.