The good, the bad and the likely
With the Federal election in just a few months, and stories of tax reform and other big ticket economic changes constantly in the press, the IOOF TechConnect team take a look at what’s on the table in the Federal Budget and the upcoming election.
Helping women back to work
While the gender pay gap is well known, retirement savings are a less familiar area where women’s financial health also lags behind men. The pay gap is a contributing factor, however career breaks to raise families, returning to lower paying jobs and being passed over for promotion all take their toll on women’s retirement savings.
It’s not surprising therefore that the Government is considering incentives to get mothers back into the workforce.
One area of consideration is to increase the maximum childcare subsidy to $10,000 (up from $7,500). What’s less certain is how this will be paid for, with reductions Family tax benefit B, and gradual phasing out of Family Tax Benefit Part A and B Supplements all on the table.
A more effective way to get mother’s back to work, we believe, is the introduction of a tax-offset for secondary income earners. That’s because – as the following example shows – in its current form, for more than one child in childcare, working three days is financially better than five!
Eva has two children under the age of five in childcare and earns $70,000 before tax in her full time role in finance. Her net income after tax and Medicare levy, childcare costs of $100 per day for 48 weeks, and the child care rebate, is $21,303.
However, Eva decides to reduce her working days to 3 days per week and look after the kids 2 days a week. Despite working less, her net income after tax and childcare costs rises to $21,563!
Reforms to retirement income streams
As super balances grown, more and more Australians are expecting super to be their main source of income in retirement. However, with Australians today expected to live well into their 80s, very few super balances will be able to support a full retirement.
Government changes restricting Centrelink payments – such as the 1 January 2017 asset test changes – will only put more emphasis, and pressure, on retirees to fund their own retirement.
That’s why the Government will likely support initiatives aimed at helping retirees more effectively manage their retirement savings. This support could be in the form of legislating superannuation providers to develop ‘Comprehensive Income Product for Retirement’ (CIPR) - a new class of products specifically designed to support pensioners in the back end of retirement.
Into the future, more and more CIPR products will emerge combining income and risk management features (such as annuities) which together with the age pension, will be layered around account-based pensions and easing the current over-reliance on account-based pensions.
It seems almost every other day a new story emerges on how the Government will tinker with superannuation to reign in its generosity to high income earners. By some calculations, the Government could save up to $6 billion a year through the reduction of the concessional contributions cap to as low as $11,000 per year.
Ironically, however this may impact the group who need concessional caps to ‘catch up’ on their super the most – that is, mums returning to the workforce.
Another possible area for super reform being touted has been adjusting the tax on super to 15 per cent below an individual’s marginal tax rate. While this would be a boon for low income earners who would pay just 6 per cent tax on super, it would also see those on the highest marginal tax rate of 49 per cent pay 34 per cent tax on their super.
This would bring in to play other investment types such as negative gearing and investments bonds which have lower effective tax rates without the undesirable aspect of super – that is, money is locked away till preservation age, usually retirement.
Whatever changes are proposed in the next months, there is little doubt that bold economic reform will be necessary eventually. To read more predictions on economic reform, from what’s likely to the more improbable, download the IOOF TechConnect paper.