Australian Federal Budget 2021 thoughts

Federal Budget’s tend to follow a bit of a pattern. The first, after a party takes or retains power implements the policy of which they were elected. It tends to be an unpopular budget, where promises might not be kept or changes to tax, support etc that are needed, can be made without fear of being ousted.

Budgets in the final year tend to be marketed more as a giveaway, bolstering confidence among voters and increasing the Governments public relations. This budget certainly followed this line with the can kicked down the road in terms of how debt created in the last year, will be tackled.

Some of the major spending points – increase spending in the Aged Care sector and raises to several areas of Women’s health are arguably patch ups of parts of society that should never have been allowed to get to the position they are currently in.

The position of the overall economy is certainly stronger than the Governments own predictions from last year. Australia’s response to the virus has certainly contributed to this with many parts of the economy closed for much shorter periods than their international counterparts but the stuttering vaccination roll out will continue to impact areas reliant on tourism.

The outlook for investments and savings leads us to continue to expect very low interest rates for many years. The Government will continue to encourage spending over saving and low interest rates helps keep their own debt repayments low.

In the long run of 20-30 years, the main ways a Government can tackle a deficit is to a) increase their tax take, b) reduce their expenditure and c) rely on inflation to reduce the Real value of the debt. Inflation in the economy certainly won’t be discouraged (a rise in prices means the Government takes home more tax among other factor) so it continues to be the main financial dragon we must fight as individuals.

There are a few points in the budget that may change our own or families strategies going forward:

Abolishment of the Work Test for those 67-74.

Currently, people aged 67 to 74 years can only make voluntary contributions to their super if they’ve worked at least 40 hours over 30 consecutive days in the financial year.

The removal of this test will allow people in this age bracket to add further to their Supers or recontribute Pension payments that aren’t needed.

Super pensions are designed to run out due to their increasing minimum withdrawals. The Government don’t want you keeping money in a tax free environment! The change to this rule will allow people to keep replenishing their Supers until their 75th birthdays if cashflow allows.

Extending access to Downsizer allowance

Currently, those aged 65+ can make a $300,000 one off contribution to their Supers from the sale of their family home ($600k for a couple with a jointly owned home.) This has now been brought forward to those aged 60+. A great option for those selling in a hot Sydney or Melbourne market and moving to a lower priced area of the country. Despite it’s name, many downsizing contributions come from people moving to a bigger property!

Using other allowance available as well, my rough calculations estimate a couple could now get up to $1,285,000 into their Supers in the year of a main home sale.

Extensions to the First Home Super Saver

The First Home Super Saver scheme allows those saving for a first home to make extra contributions to their Super, which can then be withdrawn at a later date when buying a first home. This saves them tax (as contributions can be put in as a salary sacrifice or deductible amount) and earns a predetermined return of over 3% (it is not determined by the returns of the Super.) Important to note, you cannot withdrawn contributions from your employer.

Up to $30k can be withdrawn this way currently and this has now been extended. I used the scheme myself and even as someone who should know what’s going on, found it unnecessarily complicated and hard to fathom.

Labor had said they would abolish this scheme if they came into power, so I’d always been a little hesitant recommending it, in case the Liberal party also shelved it. However, they’ve doubled down and increased the maximum withdrawal to $50k, so I think it’ now represents the best first step in saving for a first home.

But it’s still complicated! If you have children, friends or relatives who you think might need to understand this, I’m happy to have a chat and put it into plain English.