Making the best of the Budget
Although this year’s Federal Budget did not have the same impact on financial planning matters as last year’s Budget, there are still some important things to be aware of. Tax cuts, a windfall for people who qualified for a co-contribution in 2005/06, and an increase in the child care benefit are all means for celebration. While changes to the Medicare Levy and the Pension Bonus Scheme could also affect many Australians.
The Government proposes to deliver $31.5 billion in income tax cuts over the next four years with the tax relief targeted at low and middle-income workers.
From 1 July 2007, the Government has said they will increase the 30% tax threshold from $25,001 to $30,001. This will mean a person earning $30,000 or more will take home an extra $750 a year.
But lower income earners will not miss out – changes to the Low Income Tax Offset will be most beneficial for people earning $30,000 or less, while anyone earning up to $48,750 will be better off than they are now.
From 1 July 2007, it is proposed the Low Income Tax Offset will increase from $600 to $750, and will not begin to phase out until $30,000 (up from $25,000 currently). This means it will not cut out completely until $48,750 (compared to $40,000 currently). And those earning $30,000 or under will not be eligible to pay tax until their income exceeds $11,000. For seniors eligible for the senior Australians tax offset, the effect of these tax changes will lift the tax-free income levels to $25,867 for singles and $43,360 for couples.
A second round of tax breaks for middle and high-income earners will flow through next year. The Government has proposed to increase the 40% tax threshold from $75,001 to $80,001, and the 45% threshold from $150,001 to $180,001 from 1 July 2008.
In all, the Treasurer has said these proposals will ensure 80% of Australians are taxed a maximum of 30% while only 2% will be taxed at the top marginal rate, and everyone will be taking home a bit extra.
For example, for people earning between $30,000 and $40,000 a year, the combined benefit of increases in the 30% tax threshold and the Low Income Tax offset could add up to as much as $1,100 a year.
But it’s important to use the extra money wisely.
For example, imagine the impact it could make if you salary sacrificed pre-tax dollars instead of taking extra cash in the hand. Or people earning less than $58,000 could consider making an after-tax contribution to be eligible for a government co-contribution.
In this Budget, the Government has announced it will reward low income earners who took advantage of such a strategy in 2005/06 by doubling the co-contribution paid. So those who were eligible for a $1500 co-contribution will receive $3000.
This is a one-off payment only – it will not affect contributions in 2006/07 or beyond, but it goes to show the Government is seriously rewarding people who plan for their own retirement.
On top of these tax breaks, the Government is promising a number of measures to benefit families.
Increases to the Medicare low income thresholds will benefit lower income earning families with effect from 1 July 2006.
The threshold will increase to $16,740 for individuals and $28,247 for families, with the additional amount for each dependent child also increasing to $2,594. Similarly, an increase in the Child Care benefit of 10% (on top of annual indexation) from 1 July 2007, and a one-off lump sum payment to eligible carers on 30 June 2007 will benefit working families.
But retirees needn’t worry about missing out altogether. The Government has announced a couple of measures so that struggling retirees, who will not benefit from tax cuts or child care changes, can still take advantage of the current Budget surplus.
Before 30 June 2007, a one-off bonus payment of $500 will be given to each of two million older Australian who receives the Utilities Allowance or Seniors Concessions Allowance. In addition, the Government proposes to introduce a $46.4 million package to extend access to the Pension Bonus Scheme from 1 January 2008.
The Budget proposals will affect most Australians in one way or another. The new financial year is a good time to visit your financial adviser to see what you can do to improve your outlook for the future.