With a new financial year underway, it might be a good opportunity to review some of the recent changes to business and investment rules to make sure you’re on the right track.
As the inflation rate begins to ease, with consumer inflation slowing to a 13 month low in May, many commentators expressed hope that further interest rate rises may be kept in check. That led to a slight improvement in investor outlook for stocks at the end of June The S&P/ASX 200 closed the month at about the same level as in May but, over the financial year, it’s risen more than 10%.
The CPI was up by 5.6% last month in the lowest increase since April 2022. Meanwhile the unemployment rate fell slightly to 3.6%, continuing the downward trend seen over the past 12 months. That’s led to an improvement in consumer sentiment and a 0.7% jump in retail sales in May, supported by a rise in spending on food and eating out as well as a boost in spending on discretionary goods.
The Australian dollar lost gains made during the month to close at just over US66 cents as traders speculated at the end of the month that the Reserve Bank may put a hold on interest rate rises and the US economy boomed.
Will these super changes affect you?
As our superannuation balances grow larger, it makes more sense than ever to keep track of the many rules changes that have recently happened or are coming up soon.
So, check out these latest changes in case they affect you.
Super bonus for workers
For employees, the new financial year kicks off with an increase in the Superannuation Guarantee paid by employers. It is now 11 per cent of eligible wages.
This rate will increase by 0.5 per cent each year until it reaches 12 per cent in 2025.i
The Australian Tax Office will also be cracking down on employers who don’t pay on time or at all.
Minimum pension drawdown increased
A COVID-19 measure to reduce the minimum drawdown required on super pensions will end on 1 July 2023.
Investors receiving super pensions and annuities must withdraw a minimum amount each year. The federal government reduced this amount by 50 per cent over the last four financial years to help those wanting to protect their capital as the markets recovered from the chaos of the pandemic.
You can find out more by visiting the ATO’s minimum pension standards.
Transfer balance cap to be lifted
The maximum amount of capital that can be transferred to your super pension will increase to $1.9 million from 1 July 2023.ii
The transfer balance cap limits the total amount of super that can be transferred into a tax-free pension account. This is a lifetime limit.
The cap is indexed and began at $1.6 million when it was introduced in 2017. Increases in the cap are tied to CPI movements.
Extra tax for large balances
Investors with super balances of $3 million or more will lose the benefit of super tax breaks on earnings.
From 1 July 2025, taxes on future earnings will be 30 per cent instead of 15 per cent although they will continue to benefit from more generous tax breaks on earnings from the funds below the $3 million threshold.
Other recent changes
A number of changes announced in both federal budgets last year have also been slowly introduced over the past 12 months.
In one major change, the minimum age was lowered for those able to invest some of the proceeds of the sale of their homes into super, known as a ‘downsizer contribution’.
From 1 January 2023, if you are aged 55 or older, you can now contribute to your super up to $300,000 (or $600,000 for a couple) from the sale of their home.
The home must be in Australia and owned by you for at least 10 years.
Another significant reform for many has been the removal of the work test for those under 75, who can now make or receive personal super contributions and salary sacrificed contributions. (Although the ATO notes that you may still need to meet the work test to claim a personal super contribution deduction.)
Previously if you were under 75, you could only make or receive voluntary contributions to super if you worked at least 40 hours over a 30-day period.
While caps have been lifted and programs expanded, at least one scheme has not changed. The Low Income Super Tax Offset (LISTO) threshold remains at $37,000. LISTO is a government payment to super funds of up to $500 to help low-income earners save for retirement.
If you earn $37,000 or less a year you may be eligible a LISTO payment. You don’t need to do anything other than to ensure your super fund has your tax file number.
Finally, a project that may pay off down the track, the Federal Budget included continued funding for a superannuation consumer advocate to help improve investors’ outcomes.
Expert advice is important to help navigate these changes over the coming year. Call us for more information.
i https://www.ato.gov.au/Business/Small-business-newsroom/Lodging-and-paying/The-super-guarantee-rate-is-increasing/
ii https://www.ato.gov.au/Individuals/Super/Withdrawing-and-using-your-super/Transfer-balance-cap/
Planning to retire
Before you retire
If you’re planning to retire, you need to consider:
- your age including if you have reached your preservation age
- when you can access your super
- how much tax you will pay on amounts you receive
- if good leaver conditions apply if you are part of an Employee Share Scheme
- if the retirement capital gains tax concession applies, if you sell your small business.
Special rules apply if you receive an employment termination payment, genuine redundancy payment or payments from an approved early retirement scheme.
If you’re leaving your job for other reasons, such as termination, change of industry or leaving Australia the tax on payments you receive may be different.
Payments leading into retirement
If you receive a lump sum payments from your employer for unused annual or long service leave, you may pay tax on it at a lower rate than your other income. Your employer will report any lump sum payments at either ‘Lump sum A’ or ‘Lump sum B’ on your income statement or payment summary. You will need these details when you prepare your tax return.
A redundancy payment is a payment made to you when you are dismissed. This usually occurs because the job you have been doing has been abolished. Payments under redundancy are tax-free to a limit depending on the number of years you worked for that employer.
Your employer may offer staff an early retirement scheme to encourage certain groups of employees to retire early or resign. You may pay less tax on payments you receive under an early retirement scheme.
After you retire
Once you retire, you can access a number of tax offsets, such as:
- Seniors and pensioners tax offset
- Superannuation income stream tax offset
If you have income from an Australian superannuation income stream, you may be able to claim a tax offset if you’re:
- receiving a disability superannuation benefit
- receiving a death benefit income stream
- 60 or over.
Employee share schemes
If you are a member of an employee share scheme (ESS), you need to consider the ‘good leaver’ conditions. Good leaver conditions in an ESS may allow employees to retain ESS interests if they cease employment to retire from the workforce permanently during the forfeiture period.
Whether ESS interests acquired under an ESS with good leaver conditions are at a real risk of forfeiture will depend on the facts and circumstances. This includes how the ESS operates and the employee’s personal circumstances.
CGT retirement exemption for small business
If you are selling your small business assets, the capital gains tax retirement concession may apply. The retirement concession can exempt a capital gain on a business asset, up to a lifetime retirement exemption limit of $500,000. This concession allows you to provide for your retirement.
If you choose the retirement exemption, there is no requirement to terminate any activity or cease business.
If you are under 55 years old just before you choose to use the retirement exemption, you must make a personal contribution equal to the exempt amount to a complying superannuation fund or a retirement savings account.
Source: ato.gov.au
Reproduced with the permission of the Australian Tax Office. This article was originally published on https://www.ato.gov.au/Individuals/Jobs-and-employment-types/Working-as-an-employee/Leaving-the-workforce/Planning-to-retire/.
Important:
This provides general information and hasn’t taken your circumstances into account. It’s important to consider your particular circumstances before deciding what’s right for you. Although the information is from sources considered reliable, we do not guarantee that it is accurate or complete. You should not rely upon it and should seek qualified advice before making any investment decision. Except where liability under any statute cannot be excluded, we do not accept any liability (whether under contract, tort or otherwise) for any resulting loss or damage of the reader or any other person.
Any information provided by the author detailed above is separate and external to our business and our Licensee. Neither our business nor our Licensee takes any responsibility for any action or any service provided by the author. Any links have been provided with permission for information purposes only and will take you to external websites, which are not connected to our company in any way. Note: Our company does not endorse and is not responsible for the accuracy of the contents/information contained within the linked site(s) accessible from this page.
Charting bear and bull markets
Bull market surges have been longer and stronger than the bear markets that preceded them.
Bear markets occur when a share market falls by 20 per cent or more from its most recent trading high.
Volatile economic and investment conditions caused the United States share market to fall into bear market territory in 2022. Fortunately, for most Australian investors, our broad share market managed to stay of the bear woods even though it did record an overall annual loss.
Since the start of this year the US share market has regained much of the ground it lost in 2022.
And the chart below gives a good perspective on the length of bear markets over time versus bull markets – the term used to describe when markets are rising over a prolonged period.
Bear market facts
While bear markets can be daunting, on average they have lasted much shorter than bull markets and have had far less of an effect on long-term performance.
Bear markets are challenging, but bull markets have been longer and stronger
Note:
Although the downturns that began in August 1987 (related to Black Monday) and February 2020 (related to the start of the COVID-19 pandemic) don’t meet a widely accepted definition of a bear market because they lasted less than two months, we are counting them as bear markets and including them in our analysis because of their historic nature.
Past performance is no guarantee of future returns. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.
Sources: Vanguard calculations, as of December 31, 2022, using the MSCI World Index from January 1, 1980, through December 3, 1987, and the MSCI ACWI thereafter. Indexed to 100 as of December 31, 1979.
From January 1, 1980, through December 31, 2022, the average length of a bull market has been nearly four times that of a bear market.
Similarly, the depth of losses from a bear market has paled in comparison with the magnitude of bull-market gains.
That’s one reason for sticking to a well-thought-out investment plan: Losses from a bear market have typically given way to longer and stronger gains.
It’s worth noting that although the downturns that began in August 1987 (related to Black Monday) and February 2020 (related to the start of the COVID-19 pandemic) don’t meet a widely accepted definition of a bear market because they lasted less than two months, we are counting them as bear markets and including them in our analysis because of their historic nature and the magnitudes of their declines.
Important information and general advice warning
Vanguard Investments Australia Ltd (ABN 72 072 881 086 / AFS Licence 227263) is the product issuer and the Operator of Vanguard Personal Investor and the issuer of the Vanguard® Australian ETFs. We have not taken your objectives, financial situation or needs into account when preparing the above article so it may not be applicable to the particular situation you are considering. You should consider your objectives, financial situation or needs, and the disclosure documents for any relevant Vanguard product, before making any investment decision. Before you make any financial decision regarding Vanguard investment products, you should seek professional advice from a suitably qualified adviser. A copy of the Target Market Determinations (TMD) for Vanguard’s financial products can be obtained at vanguard.com.au free of charge and include a description of who the financial product is appropriate for. You should refer to the relevant TMD before making any investment decisions. You can access our IDPS Guide, PDSs Prospectus and TMD at vanguard.com.au or by calling 1300 655 101. Vanguard ETFs will only be issued to Authorised Participants. That is, persons who have entered into an Authorised Participant Agreement with Vanguard (“Eligible Investors”). Retail investors can transact in Vanguard ETFs through Vanguard Personal Investor, a stockbroker or financial adviser on the secondary market. Retail investors can only use the Prospectus or PDS for informational purposes. Past performance information is given for illustrative purposes only and should not be relied upon as, and is not, an indication of future performance. This article was prepared in good faith and we accept no liability for any errors or omissions.
© 2023 Vanguard Investments Australia Ltd. All rights reserved.
Banking on the Age Pension
The ranks of Australians receiving the Age Pension are increasing. It’s important to understand who is eligible and its role in retirement planning.
Just days before the 2023 Federal Budget was handed down on 9 May, the Australian Bureau of Statistics released a new report including data on the number of Australians receiving the Age Pension.
The report, New Census insights on income in Australia using administrative data, has largely flown under the public radar so far.
But it contains some interesting retirement insights compiled from the 2021 Census, most notably that “nearly half of Australians aged 65 years and older receive most of their income from the Age Pension (47.8% or 2,029,000 persons)”.
That’s a powerful statistic, especially when taking into account the “Support for Seniors” expense numbers detailed a week later in the Federal Budget’s Statement 6: Expenses and Net Capital Investment.
Support for Seniors (the Age Pension) has been costed in the latest Budget at $54.87 billion for the 2022-23 financial year, rising progressively on forward estimates to $67.32 billion in 2026-27.
A growing reliance on the pension
One of the key findings from How Australia Retires study, released in May, is that the Age Pension features most prominently among Australians who are still working and who have not taken purposeful steps to prepare for their retirement, and who are more likely to say the Age Pension is part of their retirement..
These steps include having a well-documented and detailed financial plan, ideally prepared by a professional financial adviser, and making extra contributions to superannuation over time.
Australians who have low confidence about their retirement generally have low expectations about the amount of income they’ll likely receive during retirement and believe the Age Pension will form the biggest component of their retirement plan.
The number of Australians receiving the Age Pension is continuing to rise, and has actually increased significantly since the 2021 Census data that the ABS has used in its recent Census insights report.
The Department of Social Services (DSS) Expanded DSS Benefit and Payment Recipient Demographics – December 2022 data shows 2,565,870 people were receiving the Age Pension at the end of last year.
This included 1,783,980 people receiving full pension payments, 393,365 people receiving part pensions as a result of the “income test”, and a further 385,525 people receiving part pensions as a result of the “assets test”.
Under the income test, individuals can earn a maximum of $190 in income per fortnight (and couples $336 per fortnight) from other sources before their pension is reduced by 50 cents for every dollar above the respective allowable limits.
Under the assets test, individuals and couples are assessed on whether they do or don’t own a home. They can hold up to a certain value of financial and other assets before their pension is incrementally reduced for every dollar above the respective allowable limits.
Single homeowners can have up to $280,000 in assets, and non-homeowners up to $504,500, before their full Age Pension starts to reduce. The Age Pension cuts out completely once singles reach maximum asset limits of $634,750 (homeowners) and $859,250 (non-homeowners), with higher cut off points for singles who receive rent assistance.
The same rules apply to couples receiving the Age Pension, but the limits are higher.
Couple homeowners can have up to $419,000 in assets, and non-homeowners up to $643,500, before their full Age Pension starts to reduce. The Age Pension cuts out completely once couples reach maximum asset limits of $954,000 (homeowners) and $1,178,500 (non-homeowners).
The growing role of the Age Pension
The DSS’s demographics data shows that there just under 400,000 Australians aged 66 to 69 that were receiving a full of part pension as of December 2022 – roughly about 15% of the total Age Pension population.
Keep in mind that this is the youngest Age Pension cohort, as individuals can potentially qualify to receive a full or part Age Pension from the age of 65 years and six months, depending on the year they were born.
The largest cohort of pension recipients (about 51%) was aged 70 to 79.
For most Australian retirees, the Age Pension forms a meaningful portion of their retirement income, and for all retirees it should be considered as part of the retirement planning process.
Two key features of the Age Pension – it is payable until one’s death, and it adjusts for inflation over time – make the Age Pension a very valuable benefit as well.
Given this, a thorough understanding of how the Age Pension works, what benefits should be expected, and its role in planning for retirement is critical.
For retirees who meet the eligibility criteria, the Age Pension can act like an inflation-protected, lifetime-income safety net.
This means that Australian retirees who are eligible for the Age Pension can expect to receive a fortnightly pay packet that maintains its purchasing power for as long as they are alive and as long as they continue to meet the assets test, income test and residency rules.
If available, it is a great resource to help meet “basic living expenses” in retirement.
To find out more, contact us today.
Source: Vanguard May 2023
Reproduced with permission of Vanguard Investments Australia Ltd
Vanguard Investments Australia Ltd (ABN 72 072 881 086 / AFS Licence 227263) is the product issuer. We have not taken yours and your clients’ circumstances into account when preparing this material so it may not be applicable to the particular situation you are considering. You should consider your circumstances and our Product Disclosure Statement (PDS) or Prospectus before making any investment decision. You can access our PDS or Prospectus online or by calling us. This material was prepared in good faith and we accept no liability for any errors or omissions. Past performance is not an indication of future performance.
© 2022 Vanguard Investments Australia Ltd. All rights reserved.
Important:
Any information provided by the author detailed above is separate and external to our business and our Licensee. Neither our business nor our Licensee takes any responsibility for any action or any service provided by the author. Any links have been provided with permission for information purposes only and will take you to external websites, which are not connected to our company in any way. Note: Our company does not endorse and is not responsible for the accuracy of the contents/information contained within the linked site(s) accessible from this page.
