Personal Finance Impact from Gillard Government.

The re-election of a minority Australian Labor Party (ALP) will have a number of consequences for our money. These is a summary of the election and policy promises which may be amended or rubbished as a result of the minority government being formed.

Taxation

Mining tax

Labor has formed a Policy Transition Group (PTG) to consult with industry and provide advice on the implementation of the resource taxation reforms. The PTG will commence its work now that Labor has been re-elected. Further information on the PTG's terms of reference and design principles of the resource tax reforms is available at this link

Small business

The re-elected Labor Government will allow small businesses to instantly write off assets costing up to $5,000 from 1 July 2012. In addition small businesses will receive a company tax rate cut to 29% from 1 July 2012, a year earlier than large companies. These measures were previously announced in the Government's response to the Henry tax review.

Family Tax Benefits

Eligible families will be entitled to the following from 1 July 2011:

- $500 upfront payment of the baby bonus.

- Arrangements for the advance payment of family tax benefit will be simplified and made more flexible, with an overall maximum advance payment of up to $1,000.

Child care rebate

The Government will give families the option to receive Child Care Rebate (CCR) payments fortnightly from 1 July 2011. Families will also be able to choose whether or not they have their CCR paid directly to their child care service and receive an immediate fortnightly fee reduction, or whether they continue to receive the CCR directly.

Families who wish to continue to receiving the rebate quarterly will be able to do so.

Superannuation

Response to Cooper Review on superannuation

The Government will work closely with the superannuation industry and employers to improve the administration of the superannuation system, including in making superannuation payments or finding lost accounts.

A full response to the Cooper Review will be released by the Government by the end of 2010, following further industry consultation; however, comments have been made in relation to other aspects of the Cooper Review, outlined below.

MySuper

From 1 July 2013 the Government will allow super funds to offer a simple, low-cost superannuation product called "MySuper". MySuper product providers will be required to meet standards, including:

· No entry fees, with exit fees limited to cost-recovery.

· A ban on commissions and conflicted remuneration structures in relation to retail distribution and advice in line with Government's financial advice reforms.

· New duties that require superfund providers to deliver value for money or be stripped of their license by the regulator.

· A single, simple and easy-to-understand investment option designed to maximise a person's retirement income.

· Standardised reporting requirements in plain English.

· MySuper funds will be licensed by APRA, who will also monitor and publish MySuper investment returns and costs;

· Anyone eligible to contribute to superannuation will be able to open a MySuper account.

Tax file number to be primary identifier for super accounts

The Government will introduce legislation to ensure that from 1 July 2011, the tax file number would be the primary identifier used to locate lost super accounts, consolidate super funds and to switch super accounts.

Securing superannuation

Labor will consult with industry on the implementation of the following measures:

· Employers to report actual Super Guarantee (SG) and salary sacrifice contributions on payslips;

· Funds to notify members and employers on a quarterly basis if regular contributions cease to be made;

· Enhance the enforcement powers of the ATO and Fair Work Ombudsman to ensure businesses pay their employees SG contributions.

Confirmation of response to Henry Tax Review

The Government has confirmed its position on the Henry Tax Review performs as follows:

· Increasing the superannuation guarantee to 12 per cent. The Government will also extend the superannuation guarantee to cover older workers up to age 75.

· Providing a new concession worth up to $500 for low income earners.

· Doubling the contributions cap to $50,000 from 2012-13 for people aged over 50 with super balances under $500,000.

Self-Managed Superannuation Funds (SMSFs) investments

The Government will allow SMSFs to continue to invest in collectables and personal use assets provided they are held according to new legislative standards. These standards will require these assets be stored according to new rules to prevent them from giving rise to a personal benefit. Existing assets that do not adhere to these rules will need to be sold within 5 years.

Social Security

Work Bonus for pensioners

The Government will introduce improvements to the age pension Work Bonus:

· The Work Bonus will disregard every dollar of income up to $250 a fortnight, rather than the 50 cents in the first $500 arrangement that currently exists.

· Pensioners will also be able to build up any unused amount of their $250 bonus every fortnight for up to 12 months, up to a maximum $6,500. A pensioner could then earn up to $6,500 a year extra, through part-time or seasonal work, without it affecting their pension.

Greater protection on reverse mortgages

Through reforms to banking regulation and credit laws, the Government will:

· Extend protection for reverse mortgages and home reversion schemes, including greater disclosure of the features and fees on these products.

· Introduce a statutory protection against negative equity so consumers aren't left with a debt significantly greater than the value of their property.

Veterans' affairs

Out of pocket medical expenses

The Government will provide eligible veterans with a reimbursement for out-of-pocket pharmaceutical costs incurred from 1 January 2012. Reimbursement amounts will be calculated automatically and paid annually, with the first payment being made in early 2013 to reimburse out-of-pocket expenses for the 2012 calendar year. Eligible veterans do not need to make a claim.

Reimbursements will not affect pension payments.

Workers' entitlements

The Fair Entitlements Guarantee

The Fair Entitlements Guarantee will protect redundancy pay, up to a maximum of four weeks for each year of service. This will replace the existing General Employee Entitlements and Redundancy Scheme (GEERS), which provides for a maximum of 16 weeks redundancy pay.

Strengthening Corporate and Taxation Law

The Australian Securities and Investments Commission (ASIC) will be given increased powers and strengthened penalties to take action against companies that do the wrong thing.

Reforms will be introduced that target 'phoenix' company arrangements.

The mechanics tools to set your financial goals

This week I caught up with Zoe Lamont, one of the brains and inspiring energy forces behind the 10thousandgirl campaign. We were having a coffee and chatting, among other things, about goal setting and the complexity and challenge that can occur with putting a dollar amount around your goals.

We both agreed that going through this process can either be a supporting influence or could cause you to realise that your goals may not be as realistic as you first thought! For example, saving $100,000 for a house deposit might be a little unrealistic in a two-year timeframe, depending on your income level, however extending this out to five years might be more achievable.

Once you have set your SMART goals (the ones that are Specific, Measurable, Actionable, Realistic, with Timeframes) the next phase is doing some financial planning to work out how to achieve your goals and if your goals and determine if those timeframes are realistic.

Shorter-term calculations can be pretty easy. For example if you wanted to save $5,000 in 12 months time, you can divide the $5,000 by 12 to work out what you need to set aside each month to achieve your goal.

Medium and longer terms goals might be a little harder as rates or return and other elements come into play.

I have put together a couple of calculations you can use as tools to see how much you need to set aside and what the effect of different rates of return can have on the outcomes.

Some points to note are that this is not an exact science. It can be a helpful way to cross check that your goals are on track and achievable and also a great negotiation tool if you need to review the timeframes on your goals.

If your goal isn’t achievable in your initial timeframe, don’t loose hope. Instead be inspired that you now have a more realistic timeframe on your goals and more clarity on what is required to achieve your outcome.

Tool 1: The Rule of 72

This is a financial rule of thumb that is used to estimate the number of years an amount will take to double assuming a specific rate of return. This formula dates back to an early Mathematician Luca Pacioli (1445–1514). Roughly translated from Wikipedia: “In wanting to know for any percentage, in how many years the capital will be doubled, you bring to mind the rule of 72, which you always divide by the interest, and the result is in how many years it will be doubled.”

For Example: When the interest is 6% per year, dividing 72 by 6 gives you 12. This means at a 6% rate of return, the capital will double every 12 years. So if you had $1,000 in a cash account earning 6%, without adding any further capital it would take 12 years for this to become $2,000.

A summary of different returns is here.

Here is an exercise for you to work with some of your own goals or plans for life.

Determine your goal and when you want it _____ number of years.
= $______________ lump sum required.

What rate of return do you need to achieve your goals? Is it realistic?

Your Starting Lump Sum $___________


Your Goal Lump Sum $__________


When do you want it? ____________ (A) # of years.


Number of times your money has to double? ___________ (B)


Number of years to double? ________ (C) = (A/B)

Expected Rate of Return ______________% (72/C )

When you look at the rate of return you need on your capital does it feel realistic? Does it seem too risky? Do you feel comfortable with that rate of return?

The Rule of 72 is all about having a lump sum but what if you have a regular savings plan for each payday or each year?

Tool 2: Regular savings calculator

ASIC’s www.fido.gov.au has some great online savings calculators but if you wanted to play around with the figures yourself, the table below makes the calculation a little easier. It assumes some different rates of return, time frames and takes into account inflation (or the annual increase in the cost of living):

Years to Goal	Assumed Rate of Return (after inflation)
	2%	4%	6%	8%	10%	12%	14%
5	5.31	5.63	5.98	6.30	6.72	7.12	7.54
10	11.17	12.49	13.97	15.65	17.53	19.65	22.04
15	17.64	20.82	24.67	29.32	34.95	41.75	49.98
20	24.78	30.97	38.99	49.42	63.00	80.70	103.77
25	32.67	43.31	58.16	78.95	108.18	149.33	207.33
30	41.38	58.33	83.80	122.35	180.94	270.29	406.74
35	50.99	76.60	118.12	186.10	298.13	483.46	790.67
40	61.61	98.83	164.05	279.78	486.85	859.14	1529.91

_{This table was adapted from Barbara Smith & Dr Ed Koken’s “Superannuation in a nutshell”.}

Look at the first column to determine the number of years to your goal. Example: achieve financial freedom in 20 years.

Now look along that column to determine your expected rate of return, for 8% per annum the figure is 49.42.

Take your required capital amount and divide it by this number. $1,000,000 / 49.42 = $23,573.79 per annum. This is the annual investment amount you need to put aside to achieve the outcome at an 8% return. You can then turn it into a weekly, fortnightly or monthly amount as needed.

Try this for yourself with one of your goals; it could be buying a house in 5 years and needing a certain deposit, or saving enough money to set up your own business, or even the goal of financial freedom depending on your needs.

Your capital requirement = $_______________________ (A)


Estimate of years to reach your goal = ___________________ (B)


Estimated rate of return from your fund = ____________ (C)


Factor from table above = _________________________ (D)


Required amount to save each year = (A) / (D)= ________________

If you need assistance in exploring these further talk to a professional but most importantly, start your journey to creating wealth with understanding.

The information provided on this article is of a general nature only. It has been prepared without taking into account your objectives, financial situation or needs. Before acting on this information you should consider its appropriateness having regard to your own objectives, financial situation and needs.

Henry Tax Review - Is it Super?

This week the Federal Government released their response to the Henry Tax Review which was looking at the areas of Retirement Savings, Personal Taxation and Social Security. With an election looming there were not any major changes to the system at this stage but watch this space as the Federal Budget is released next week.

The Henry Tax Review was over 1000 pages long with 138 key recommendations the changes which the government has released are summarised as below:

• the superannuation guarantee (SG) rate will increase gradually from 9% to 12% from 1 July 2013
  
  
• the SG contribution age limit will increase from 70 to 75 from 1 July 2013
  
  
• a Government super contribution of up to $500 p.a. will be made for people earning up to $37,000 p.a. from 1 July 2012 to effectively refund contributions tax
  
  
• the Concessional Contribution cap will be reinstated to $50,000 p.a. from 1 July 2012 for people aged 50 or over with super balances below $500,000
  
  
• the company tax rate will gradually reduce to 28% by 1 July 2014 (and two years earlier for eligible small businesses)
  
  
• very generous depreciation rules will apply to small businesses from 1 July 2012
  
  
• a 40% Resource Super Profit Tax will be introduced from 1 July 2012

The Government has publicly rejected some recommendations which have some good implications while this government remains in term atleast:

Social Security

• The family home will NOT be included in the means testing;
• Parents will NOT be required to work when youngest child turns 4 to access benefits;
• Rent assistance eligibility will NOT be restricted;
• Age Pension indexation will NOT be reduced;
• Pensioner and low income concessions for utilities, transport and other essential services will NOT be reduced;
• State Governments will NOT be asked to change the market rent for public housing recipients.

Superannuation

• Preservation age and pension age will NOT be aligned;
• The Government will NOT offer an annuity income stream product.

Taxation

• Land Tax will NOT be introduced on the family home;
• No changes will be made to the taxation system to harm not-for-profit sector including removal of tax concessions;
• Capital Gains Tax discount will NOT be reduced;
• Medicare Levy will NOT be removed;
• Dividend imputation will NOT be removed;
• Bequests tax will NOT be introduced;
• Luxury car tax will NOT be abolished; and
• Fuel tax will NOT be indexed to CPI.

Other Comments

• Defence force personal will NOT have remuneration reduced;
• The Government also re-affirmed that it will never increase the rate or broaden the base of GST; and
• The Government also stated it would not remove tax free superannuation payments for individuals who are 60 or over.

My view it that we may see some other changes come through with the Governments final budget before the election campaign begins but being mindful of the election cycle I wouldn't image any major changes to the taxation system would come into the picture.

Watch this space as I will be keeping an eye out on the upcoming Budget and will provide a summary of any changes as they come to hand.

Scott Malcolm (scott@money-mechanics.com.au) is Director of Money Mechanics (ph: 6257 5557) a fee for service advice firm who are authorised to provide financial advice through PATRON Financial Advice AFSL 307379.

The information provided on this article is of a general nature only. It has been prepared without taking into account your objectives, financial situation or needs.Before acting on this information you should consider its appropriateness having regard to your own objectives, financial situation and needs.