Budget light on financial services issues

The handing down of the recent Federal Budget revealed no real concerns for the financial services industry. In the words of one corporate commentator: "It is a bit of a lame duck. The main game is tax reform, which is a post Budget issue".

Further, the size of the Budget Surplus for 1999/2000 ($5.4 billion) is depend-ent upon the unhindered passage of the Tax Reform Package and Telstra sale through the Senate. The exemption of food from the GST for example, could wipe out the surplus.

Howeve

The handing down of the recent Federal Budget revealed no real concerns for the financial services industry. In the words of one corporate commentator: "It is a bit of a lame duck. The main game is tax reform, which is a post Budget issue".

Further, the size of the Budget Surplus for 1999/2000 ($5.4 billion) is depend-ent upon the unhindered passage of the Tax Reform Package and Telstra sale through the Senate. The exemption of food from the GST for example, could wipe out the surplus.

However, the Budget is not entirely devoid of implications for planners. One area of change concerns the gifting limit, with a reduction from $10,000 to $5,000 from 1 July 1999.

Until 1 July 1999, a pensioner/allowance recipient may make a gift of assets up to $10,000 (single or couple combined) and have their social security entitle-ment recalculated to reflect the lower asset holdings.

Income values will also drop where the gifted assets are financial. This in-cludes money or any asset transferred to direct family or relatives and assets disposed of for less than their current market value. This is reduced to $5,000 from 1 July 1999. The other major change is the move from a pension year (based on anniversary of grant) to a financial year basis.

Existing cases of deprivation will continue to be treated under the old rules. Astute planners, however, will consider other methods to improve the means test position. Such methods include:

* The purchase of asset test exempt income streams, using term complying prod-ucts for aged pension or service pension recipients and lifetime for other cli-ents.

* Investment in accumulation superannuation where the single applicant or either member of a couple has not had 39 weeks of social security since age 55. There are variations on this strategy, particularly where one spouse gifts super to a younger spouse or a spouse not on an allowance.

* Expenditure in paying off a mortgage, home improvement, holiday and granny flat interests and funeral bonds.

There are also separate strategies for improving outcomes where the income test is applicable. Such strategies include the establishing of allocated income streams (including the re-rolling strategy) or nil Residual Capital Value (RCV) income streams and the change from financial to non-financial assets.

By reducing the amount that can be given away, the Government hopes to reinforce the message to clients and to the financial planning industry about the role of social security and the individual's responsibility to provide for their own fi-nancial wellbeing.

Centrelink recently released a question and answer paper that similarly covered the issue of the application of the deprivation provisions where an income stream is being paid by a self managed super fund (SMSFs).

The paper says that where an income stream is paid by a SMSF, the pension member might not always receive the best possible returns. Centrelink can assess the appropriateness of the income stream in relation to the amount invested.

In such a case, the government actuary will calculate the asset test value of the income stream by discounting future expected income stream payments at an assumed interest rate. If deprivation has occurred, the amount disposed of (less the allowable gifting limit of $5,000) will be deemed an asset for pension pur-poses for five years.

The rate used by a private actuary in determining the level of pension payments for a SMSF paying an asset test exempt pension is often greater than the rate used by the government actuary and so generally these deprivation rules will not apply.

The Budget also introduced Lifetime Health Cover. Under these measures, health funds will base their premiums on the age at which a member first joins the fund. This means that people who join a fund early in their lives will pay lower premiums than those taking it out later in life. A 12-month grace period will apply from 1 July 1999.

Members who join before age 31 or during the grace period will always pay the base rate premium. Members who join after 1 July 2000 and are aged 30 or over will pay a 2 per cent loading on top of the base rate premium for every year they delay joining. For example, a person who delays joining a health fund until age 40 will pay 20 per cent more than someone who joined at age 30. The loading is capped at 70 per cent above the base rate premium. Members aged 65 and over as at 1 July 1999 can join at any time for the base premium rate.

With the superannuation surcharge reducing the effectiveness of salary packag-ing, high-income earners should consider restructuring their personal finances at financial year-end to accommodate the health cover changes.

Executives may look to larger employer groups to negotiate with health funds for low cost medical group cover for employees.

As predicted by many in the financial planning industry, there were few sur-prises in the 1999 Budget. No new superannuation details were released, the Gov-ernment simply reaffirming its proposed policies for choice of fund superannua-tion, family law changes and preservation dates. The reduction of the gifting provision, however, will give planners the opportunity to evaluate the financial strategies of those clients affected by this change.

Ends