Disclaimer: What you're about to read is of a general nature and doesn't take into account your personal financial situation, needs or objectives. We recommend you seek financial advice before making any decisions about your super and consider the relevant UniSuper PDS and TMD.
Rob: Hello, and welcome to the special Federal Budget edition of Super Informed Radio. I'm Rob.
Marta: I'm Marta.
Lyndon: And I am Lyndon. Now, Marta, you are looking a little bit bleary-eyed. You were back here late in the office covering the budget yesterday. Is that right?
Marta: That's right. And I forgot my concealer, so I'm very sorry about that. Yeah, a little bit went down. After the past few budgets seeing some considerable changes to super, a few of us were a little bit surprised that there were a few more. But, so having said that, to help break down the announcements, I thought we could bring back one of our special guests, and our resident policy guru, Benedict Davies, to take us through some of the key announcements at a high level.
Benedict: Thank you.
Marta: Now, it's your favourite night of the year, isn't it?
Benedict: Certainly one of them.
Marta: What's your other one?
Benedict: Census night.
Lyndon: He's a numbers man.
Marta: Why is it such a big deal? I see, like, this morning all the papers and stuff have special pullouts and features on it.
Benedict: Governments, you know, for them the budget, is an opportunity to make a number of policy announcements that they don't ordinarily make throughout the year. So, it's really, in many governments' eyes, a really big chance for them to say and make significant policy announcements. So we do often see statements about tax cuts, we do often see statements about superannuation, fairly regularly.
Lyndon: All right. Well, down to business then, I guess, Benedict. What were some of the announcements that our listeners might be interested in hearing about? Anything?
Benedict: There were many, many announcements, and reams of paper are being produced. Of interest, I think, will be the handful of superannuation-specific announcements, and some on the tax cuts.
Now, when we say "announcements," we are talking about announcements. So everything I talk about is still only proposals at this stage. The government needs to actually pass legislation to make all of these proposals law.
Lyndon: They're not law.
Benedict: Not law. Proposals at this stage. And some of them are open for consultation with the industry. So, one of the first ones that I'll briefly mention is changes to fees and insurance within superannuation.
Marta: So, what was the deal with insurance, because I think there was something to do with under 25s announced?
Benedict: There had been concerns expressed that people under 25 may not need insurance, or may not understand they have insurance, that certainly there's some evidence of that. Obviously there are some benefits of insurance as well, so the governments announced a policy of essentially younger people opting in to have insurance rather than choosing to opt out once we've defaulted it for them.
Now, just with this announcement, be careful, as well, because it's people under 25, but it's also people with small balances, so below $6,000, and those who don't have active accounts with regular contributions. So it's an announcement that will affect younger people, potentially those with low accounts, and potentially those with inactive accounts as well, and essentially saying that you'd need to make some positive decision to take out the insurance, rather than have it defaulted as a product offering.
Now, we do default insurance to members, because currently the law requires us to offer default insurance to members, with our MySuper offerings, that's our Accumulation 1 product. The one thing to note if you're in the Defined Benefit scheme, and maybe wondering if this is going to apply to you, Defined Benefit members are exempted from this because Defined Benefit has something called inbuilt cover, which looks a bit like insurance, but technically isn't insurance.
Again, though, this is subject to consultation in the next three weeks, and there'll be different views across the industry, different funds. There'll be some people saying, you know, this might make it harder for young people to get insurance because they may need to have it underwritten, they may have health conditions. So I don't necessarily say this is gonna be an easy thing for the government just to pass this law in the next few weeks.
Lyndon: So you mentioned there's going to be a bit of consultation and stuff around this. If whatever it ends up being goes through, when would that become effective from?
Benedict: There's quite a complex proposed effective date, but, 1 July 2019 is the date to think of, but there's some period where funds will be in touch with members who are potentially affected by these measures, asking them to do certain things. It's not yet perfectly clear how that particular period of time will apply, but it talks about a 14-month period.
So, yeah, we, and everyone else in the industry, is analysing this. They put up some draft legislation late last night, on top of the hundreds of pages of budget papers, so there's still a fair bit to go through to really understand this measure. But if you're over 25, you've got an active account, and your account's more than $6,000, right now...say, well, it's not really going to affect you immediately, but it is really designed for those first entering the workforce with small accounts. And, in younger people, it may affect the way they acquire, or, if indeed they do inquire insurance through superannuation.
Marta: So another announcement related to lost super and the ATO having a little bit more authority to proactively help people reunite with their lost super. Can you flesh that out a little bit?
Benedict: Yes. So, for some time now, the ATO has been consolidating small lost, inactive superannuation accounts, and this will change that a bit further so that it'll be even easier, from the ATO's perspective, to consolidate these accounts. Essentially, consolidation means we tell them we have a person who, say, has got $4,000, hasn't received a contribution for five years, we have received lost returned mail, those sorts of things, and then because it looks like the person's lost, we transfer the money to the ATO. The ATO then has a process where they're meant to reunite the person through their tax file number with their superannuation.
This announcement is saying that those with less than $6,000 in superannuation, and not having had a contribution for more than 13 months, are potentially lost. Currently the rule is five years, so we need to look at this closely because, you know, there are reasons why you may not have a contribution for 13 months. You may be on a parental leave, you may be on a sabbatical overseas. So we'll see what happens with this. So, I guess the thing is to keep on top of your superannuation at all times, you know, lest you want it to be consolidated by the ATO.
Marta: Yeah. It's probably an appropriate moment to chime in here and say members can actually log into their account online, and we can do some of that digging up for you. So head on over there if you're interested.
Benedict: There was another measure. So, the two we have talked about so far, part of a package called Protecting Your Super, and there was also another measure about fees. And, for some time there's been some disquiet in government and policy circles about fees eroding low account balances, and this measure would impose caps on fees for small account balances. So account balances below $6,000, there'd be a fee cap of 3%.
So, even with low fees, if you have a flat dollar fee, say, of $1 a week, $52 a year, that can easily be 3% of a figure. So it looks more likely that fees for small balances might be percentage-based only rather than flat dollars. I'm just sort of speculating how that might work. And it won't impose new costs on members. It'll in fact lower fees on smaller account balances.
Rob: Benedict, I saw there was also a proposal about banning exit fees with super funds?
Benedict: Yes. So that's part of that fee package as well. Again, the MySuper regulations, when they passed that, did allow for exit fees. Good news is UniSuper doesn't charge exit fees.
Benedict: There aren't a lot of exit fees in the industry, but there's some to be aware of. And so they're saying that, you now, exit fees on leaving a particular product, a sort of type of deferred fee, I guess. We need to see how this actually plays out, but it may affect some arrangements with some schemes out there. And so, yeah, exit fees will be banned, as well, from the successful passage of this legislation.
That's part of this sort of reforms, is this package dealing with fees and insurance. My guess, the second tranche of...and the government's policy around the budget that will be of interest to people is proposed tax cuts.
Marta: Yeah. So that was widely expected to happen. There were some...I noticed there were some Oprah memes going around saying, "You'll get a tax cut. You'll get a tax cut. Everyone gets a tax cut." It's a bit of a phased approach in the tax cuts. Is that correct?
Benedict: Yes. So it's actually part of a fairly sort of complex seven-year plan. So I guess the first thing to note is they're gonna uplift the $87,000 tax threshold to $90,000, which would mean some tax cuts initially targeted to that particular group. They're also gonna do tax cuts through a targeted tax offset. Now, a tax offset is just something that reduces your tax. So, the current low-income tax offset, the LITO, you may have heard of, is $445 for those earning less than $37,000. So, you know, you have, say, $40,000 of income, you pay tax at that, but you can take $445 off. That's a targeted measure so high-income earners don't get the low-income tax offset.
So the target that they're gonna introduce a new tax offset a bit like the low-income tax offset, but it might now be called the low-middle-income earner, let's say, LIMTO, I don't know if they've actually put an acronym to this yet. But, you know, we like our acronyms, LITO. We've got LISTO for superannuation. "S" stands for "super," and maybe "M" could stand for "middle," we don't really know. But, again, that would target tax cuts over a transition period, because the government, longer-term would like to flatten and simplify taxes with a view by 2025...I think that's the right year, 94% of taxpayers would all be paying a flat rate of tax, roughly of 32.5%, or they'll at least be in that bracket.
When I say a flat tax is not quite true because you've got thresholds and other things as well, but most people would be in this single band on their tax. And that's the longer-term plan, but certainly, 1 July 2018, the government would like to pass more to get these initial tax cuts through, and would then obviously like to go ahead further with a seven-year tax reform proposal.
The thing to note when you hear about tax...this is personal income tax, the good thing is there's no new taxes on superannuation. It doesn't really affect the tax status of superannuation. There's nothing in there about changes to concessional contribution caps. There's none of the measures you've seen over the past few years, so this is personal tax cuts and not superannuation-related taxes.
Rob: A lot of the measures from the 2016 budget, of which there was a huge tranche of changes, started to come to effect the next financial year onwards, anyway. So there's still that for us to see, isn't there?
Benedict: Absolutely. So we're still dealing with things from the previous budget such as catch-up contributions. If you haven't used up your concessional cap, you may be able to carry forward some of those things, and that's coming in from last year's budget.
Lyndon: Now, Benedict, there were also some announcements around, you know, aged care, and something I think is called More Choices for a Longer Life. What did that entail? Can you give us a bit of the...?
Benedict: Yeah. It looks to be a fairly reasonable substantial statement on ageing policy. So it has a lot to do with age pension, but also aged care, and has a few superannuation announcements thrown into the mix such as, in 2019, for those who have retired, they may be able to have some relaxed work test rules so you can contribute to superannuation the financial year after the one in which you've retired.
This is a broader package that I think we're gonna have to analyse further, and probably do something for members on this as a sort of holistic retirement advise thing, because it really does a lot more than superannuation. It includes a number of measures to help people stay in the workforce, help people keep working and receive some age pension.
Of interest to some people, also, is that an expansion of a government reverse mortgage scheme, where you could borrow against your home and increase the age pension. This bill could apply to receive up to 50% more age pension than they're currently receiving, and home care funding packages as well.
So, really, it is quite a statement about an ageing population, which really earned this budget the moniker of "baby boomer budget," if I could say that, or "baby boomer bonus." It's all quite hard to say, but I'm making too much light of what is...in fact, looks like quite a serious policy announcement about how to deal with an ageing population.
Rob: Interesting. Well, if our members want to know a little bit more about what was covered in this year's budget, and they wanna ask you a question, Benedict, they can in an upcoming webinar. Marta, is that right?
Marta: That's correct. So, tomorrow, Thursday, 10th of May, at 1:00 p.m. Melbourne time, you get a chance to ask Benedict any questions you might have about this week's announcements. Simply go to unisuper.com.au/webcasts to sign up. And don't worry, all the links will be in our show notes in case you missed that.
Lyndon: All the best with the webcast, Benedict. I'm sure some interesting early questions will be thrown at you by our listeners.
Rob: Hope you've read that budget, cover to cover.
Benedict: Not yet, but there's still time.
Marta: Thanks, again, Benedict, for coming in this morning.
Benedict: It's been a pleasure.
Lyndon: So that wraps up this month's special "Federal Budget" edition of Super Informed Radio. Thank you so much for tuning in.
Marta: Remember, you can check out our detailed analysis of the budget at unisuper.com.au/budget. And don't forget to sign up for the webcast.
Rob: And you can catch up on past episodes of our podcast at unisuper.com.au/podcasts, or subscribe to us through any good podcast app. We'll see you next time.
Marta: Bye for now.
Lyndon: See ya.