Budget 2022: Ten things every investor should know about Labor’s federal budget

As expected, the government did not go anywhere near the planned personal tax cuts which have been legislated by the previous Coalition. There is every chance, of course, that the issue will resurface when the whole budget circus is held again next May. But don’t be misled, the government will have to collect every last cent of potential tax revenue if they really do go ahead with the next phase of tax cuts.

As expected, the government did not go anywhere near the planned personal tax cuts which have been legislated by the previous Coalition. There is every chance, of course, that the issue will resurface when the whole budget circus is held again next May. But don’t be misled, the government will have to collect every last cent of potential tax revenue if they really do go ahead with the next phase of tax cuts.

No wonder they have given the ATO an extra $80m to do a combination of “proactive, preventive and corrective activities” over the next four years to extend the personal income tax compliance program. It’s one of the best earners in the entire budget – it costs $80m, it will bring in $674m.

Your super

The big news on super is that the Treasurer has left it alone. All of the current “caps” and limits remain undisturbed. In reality, no change here also means the tax-free super concession – the amount that can underpin tax-free retirement income – is going to rise substantially next year. The total balance cap is currently $1.7m – under preset inflation indexing it is hurtling towards a $200,000 increase to $1.9m on July 1.

Industry stakeholders had expected the Treasurer could “freeze” the indexing, however he has waved it through. This time around, the government has also left sleeping dogs lie on the total amount of super that can be kept by any individual in the system. For now, there remains no limit – there are an estimated 16,000 people with more than $5m each. 

Your pension: deeming rates and the Seniors Card 

The best news for anyone accessing the pension is that the pandemic setting for deeming rates – that is, the rates which predetermine investment income assessments for pension access – do not change for another year. Though official interest rates have moved up substantially since last year, the deeming rates remain unchanged, starting at 0.25 per cent until June 2024.

On top of that, there is a major widening of access to the Commonwealth Seniors Health Card, where the income threshold moves up from $61,284 to $90,000. This is a confirmation of good news for those worried that improved returns from term deposits might have threatened their pension access. The lift in the CSHC is particularly generous, representing an increase that is several times even the current level of elevated inflation. 

Your pension – drawdown rates

However, for those who deftly manage their superannuation income stream, it looks like the pandemic era drawdown rate “discount” is not to be extended. At the height of the Covid downturn, the government decided that drawdown rates would be cut by 50 per cent – the government has not detailed any plan to extend the discount into 2023-2024. Drawdown rates range upwards from 4 per cent (2 per cent with the current discount) – they determine the amount that must be used from super for retiree income payments each year. The discount was introduced to avoid having retirees required to sell assets into falling markets during the crisis. Ironically, many investors – especially in the sharemarket – could reasonably argue that investment conditions this year are certainly worse than last year.

Your franked dividends

One of the few unexpected moves in the budget comes in the form of a clampdown on franked dividend schemes from major listed companies.

Active investors – especially Self-Managed Super Funds – often make some extra money from special “deals” created by listed companies. Typically, it might be what is called an off-market buyback – where the companies directly offers a deal to its shareholders, sidestepping having to pay for shares in an on-market buyback. The companies offer franked dividend benefits within the deals, and shareholders are often willing to sell their shares into the offer because they do better per share sale (post franking) than they might have done at another time. In turn, the companies save money on the costs of the wider exercise, which might be a “return of capital”. BHP famously saved billions of dollars in a recent capital management exercise. The budget measure is expected to ultimately bring in $200m per annum for the government.

Separately, but not unconnected, investors remain concerned over how Treasurer Jim Chalmers will execute a plan to stop big companies issuing franked dividends to shareholders while raising capital at the same time: If this plan (currently in review) is introduced retrospectively, investors could be hit with unexpected bills relating to past transactions. That remains a risk until the Treasurer rules it out completely – there is no reference to it in the budget. 

Your property plans

The vast bulk of property related tax issues, such as negative gearing and capital gains tax, have been left alone once again. The one change confirmed by the budget – which was one of those “if you do it, we’ll do it” election promises where ALP matched the Coalition – was the changes to “super downsizing”.

To recap: the super downsizing scheme allows you to sell your home and put the proceeds into super even if you had been in breach of traditional rules, i.e. you were too old. Under the changes, you can do super downsizing from the age of 55 – when the scheme began, it had been 65. There has also been a loosening of pension related restrictions in the scheme. Keep in mind, the scheme has been one of the key policy wins in recent times. It is also worth knowing there are no actual rules that require you to buy a smaller house.

Your portfolio and inflation outlook

The outstanding “macro” message is that inflation for the next financial year (2023-24) will be higher for longer than anticipated – it will be around 3.5 per cent, and then it will drop back to 2.5 per cent a year later. In common with the unconvincing forecasts for future commodity prices of iron and coal, these projections mostly suit the government’s overall narrative.

Unfortunately, investors can’t rely on federal budget forecasts: they have been wrong for deficits and commodity prices, so why would they get it right on inflation? For anyone living on fixed income – especially pensioners – the best approach would be to assume inflation at best will drop in the near future, but it is just as likely to remain elevated and inflation proofing your investments remains crucial. Analysts suggest that investing in strong dividend paying companies that can grow those dividends each year is one of the best moves. For fixed income investors, wealth advisers have been recommending floating rate bonds. 

Your ‘green’ investment opportunities

As an investor, it never pays to fight the trend. In this Labor budget there is not just millions aimed at clean and green assets but a clear effort to catch up with the rest of the OECD in terms of the use of clean energy. For a government that is presenting itself as conservative, there is a lot of money being put into a lot of “ambitious” concepts.

The smartest companies will make hay while the sun shines with this regimen, and opportunities should abound for companies – especially smaller listed companies – that can make a good business into a more profitable one of the back of government incentives. For most investors it may be too risky to put money in single asset “green” shares, however a new wave of “green” Exchange Traded Funds have been released to local investors this year. 

Your access to parental leave and childcare subsidies

Incentives for working parents – in terms of a big expansion in the term of parental leave payments and a hefty $5bn plan to subsidise childcare to more than 1.2 million families – mean you might be entitled to some payments even if you were not in the past. More broadly, the private childcare sector is underpinned by government funding for the foreseeable future.

Listed childcare companies have ahead a very mixed history on the local sharemarket, but wealthy private investors have done well out of individual assets operating in good locations. Investing in childcare centres is particularly popular with larger Self Managed Super Funds, where they are primarily viewed as a long-term property play. 

Your next car

The trade-off between the future cost trade of petrol cars versus electric cars is changing, if a lot more slowly than many might have anticipated. State governments are offering a slew of different deals and different taxes. But the federal government has now introduced an EV discount which sounds attractive – however if you look at the well flagged initiative, which exempts EVs from fringe benefits tax and import tariffs, they are highly conditional.

For many consumers, concerns are emerging over the eventual second hand value of cars on the road today. If you are seriously interested in checking out all financial inducements around EVs, then the promised 100 per cent tax deductibility for EV leasing (against partial deductibility for petrol cars) needs to be considered too.