Investing essentials - franking credits
What will the budget mean to you?
This year’s Budget aims to ease cost of living pressures while ensuring the nation lives within its means. While aiming for ‘fairness, security and opportunity’, the budget offers a welcome emphasis on affordability and infrastructure.
Health
The National Disability Insurance Scheme will be fully funded beyond 2019. Medicine prices will fall (partly thanks to generic brands being used wherever possible), with additional drugs also added to the PBS.
The cost of visiting a GP will fall as a freeze on Medicare rebates for bulk-billing doctors is lifted. Bulk billing incentives for diagnostic imaging and pathology services will also be reintroduced. The catch is that the Medicare levy is being bumped up from 2 to 2.5 per cent from 2019. This is especially painful for high-income earners looking forward to the end of the deficit levy they’ve been paying for three years.
Education
The government is ploughing an extra $18.6 billion into schools over the next decade. In most cases, this will reduce the need for private schools to raise fees and public schools to demand greater ‘voluntary’ contributions. Nevertheless, a small proportion of private schools will have their funding cut under the Gonski needs-based-funding formula the Government has now embraced.
The price of university degrees will increase 7.5 percent between 2018 and 2021. As of July 2018, graduates will need to start paying back their HELP loan at the lower threshold of $42,000. This will impact the after-tax incomes of university graduates but not for at least a year.
Housing
A range of initiatives is being offered to address the issue of housing affordability. Those saving for a home deposit can salary sacrifice up to $15,000 per year and $30,000 in total into their super. They will enjoy all the tax benefits of super (such as a 15 per cent tax rate) while still being able to withdraw the money when they find their dream home. Older Australians over 65 and wanting to downsize, will be able to make a non-concessional (after tax) contribution of up to $300,000 into their super after selling the family home.
While the Government has made good on its promise to maintain negative gearing, property investors have little to cheer about. They’ll no longer be able to claim a tax deduction on the costs involved in travelling to inspect their properties. There will also be a tightening of depreciation deductions. Deductions for plant and equipment – for example, a washing machine – will only be allowed for the investor who purchased them. (Previously, subsequent owners of an investment property could also make deductions on these items).
Initiatives to limit foreign investment, will presumably ease demand and impact capital growth and rental yields. These include a 50 per cent cap on foreign ownership in new developments, as well plans to unlock surplus Commonwealth land. As a sweetener for those investing in affordable housing there will be a CGT discount of 60 rather than 50 per cent.
Seniors and small business
Small businesses with a turnover up to $10 million will be able to immediately write off expenditure of up to $20,000 on business equipment for another year.
There will be 92,300 pensioners delighted to learn they’ll be getting back the concession card they lost when the asset test came into effect earlier this year.
If you are finding that the financial pain is outweighing the gain in this budget, keep in mind Australia has long outperformed most equivalent first-world economies, pointing to what the Treasurer described as “better days ahead”.
If you’d like more information on how the measures contained in the Budget will affect you, please give us a call.
Counting the cost of education
A quality education is a lifelong resource and a powerful launching pad for young Australians. But with education costs rising at more than twice the rate of inflation, it’s more important than ever to plan ahead for the investment you’re making in your child.i
Grandparents may also like to help their family by investing money for the future school and university costs of their grandchildren. This is becoming increasingly common with 29 per cent of grandparents wanting to draw down on their super to pay school fees.ii This can be done in the grandparent’s name or the child’s name, depending on your individual circumstances.
The actual cost of your child’s (or grandchild’s) education will depend largely on whether they are enrolled in a public, systemic (e.g. Catholic) or independent private school.iii
The ASG survey found that the cost of private education in metropolitan areas – from preschool to year 12 – ranged between $360,000 and $550,000. Private schools in regional areas are slightly more affordable.
In contrast, Melbourne public schools, even at 12 percent above the national metropolitan average, will still only set you back $75,000. Regional areas, again, cost less on average at $50,000. These estimates include the ‘voluntary contributions’ in lieu of fees that most public schools ask for.
Systemic schools, such as religious and other alternative institutions, sit between the two extremes. Here the national metropolitan average is an estimated $230,000 and $172,000 for regional areas.
Of course, fees aren’t the only cost you need to budget for. There are the traditional outgoings of uniforms, books and extracurricular activities. It’s also becoming increasingly common for schools to require students to purchase laptop or tablet computers.
ASG estimated that in 2016 families were spending an average of $1000-$3000 on these ‘extras’ per child every year. It was also found that these costs increased as the student aged, whether they were private, systemically or publicly schooled.
And let’s not forget the cost of higher education. An undergraduate degree currently costs between $6000 and $10000 each academic year, depending on the course chosen.iv Most students choose to defer payment via a HECS-HELP loan, but many families would like to help their children or grandchildren pay some or all their fees upfront to avoid a large student debt.
Where students live away from home, parents may also need to factor in the cost of student accommodation and other living expenses.
Explore your savings options
Like any major investment, the sooner you start saving the more options you will have. You could open a dedicated savings account, but the interest rate is unlikely to keep pace with inflation. Here are some popular strategies for long-term education savings:
- Education Funds. These are specifically designed to lock money away for your child’s education. They offer some attractive tax concessions, but there are restrictions and fees to consider.
- Term deposits. Are simple and virtually risk free, but interest rates may not keep pace with inflation.
- Managed Funds. You don’t need much money to get started, you can make regular contributions and you get the benefits of diversification and professional management.
- Insurance Bonds. Like a managed fund, these offer a diversified investment menu but with additional tax advantages. Earnings are taxed inside the bond at the company rate, which may be less than your marginal rate. If you withdraw your money after 10 years, all investment earnings are tax free.v
Investing in a child’s education is a long-term commitment, but the satisfaction that comes from knowing you have given them the best possible start in life is priceless. Call us if you would like to discuss an education savings strategy for your child or grandchild.
i Trading economics, http://www.tradingeconomics.com/australia/inflation-cpi
ii http://www.smh.com.au/national/education/grandparents-stumping-up-for-private-school-fees-20160225-gn3hst.html
iii https://www.asg.com.au/doc/default-source/Media-Releases/Planning-for-Education-Index-2016/ASG_EdCosts_SchoolCosts_2016_NAT_Metro.pdf
iv http://www.gooduniversitiesguide.com.au/Support-Centre/Funding-your-education/Degree-costs-and-loans/Commonwealth-Supported-Places#.WCtxAOErKRs%20
v https://www.moneysmart.gov.au/investing/complex-investments/investment-and-insurance-bonds