The Federal Budget Wrap-Up

One of Australia’s prominent Tax Advisers, Stephen Cribb from Prosperity Advisers took a close look at the Federal Budget for us and gives us a rundown over breakfast of the important elements for individuals and superannuation holders… 

This was a budget of both comedy and tragedy, potentially playing out the final act in Treasurer Wayne Swan’s Federal Budget performance.  It was safety first all night, with the government largely reannouncing many of their previous big announcements and it looks as if there is nothing in it that would prevent them leaving the floor on September 14, 2013.

The Budget confirms the previously announced deterioration in the national financial outlook.  Declining commodity prices, decreasing company tax revenues, worryingly low carbon tax and mining tax revenues all contribute to a dramatically lower revenue stream.  It has been comedic watching the treasurer over recent months trying to predict forward revenue.

In their final act it looks as though the Government has decided to attack corporates and foreign investors to achieve what looks to be only modest revenue gains, but may present to the world that Australia is indifferent to inbound foreign capital investors and corporate innovation, research and development.  

The announced superannuation reforms look concerning and potentially raise a whole range of injustices and inconsistencies.  They will likely raise a red tape boom in which compliance costs soar across the country.

Small and medium business gets just about nothing (again), with only a change to the rebates on R&D to quarterly to help with cash flow.

The big spending items were all announced well in advance of the budget.  Gonski education reforms, DisabilityCare Australia funded by an increase to the Medicare levy from 1.5% to 2% from July 2014, and reannouncements of large infrastructure investments that were already known.  There is certainly nothing to set us up for the next economic boom and for all the efforts, it is unlikely that many of the announcements will see the light of day after the election.

But what matters to you, the over 60s?  Lets take a quick look…

INDIVIDUALS & FAMILIES

Increase to the Medicare levy

From 1 July 2014, the Medicare levy will increase from 1.5% to 2%. This increase in the levy will fund DisabilityCare Australia.

2012/13 Medicare levy low income thresholds

The Medicare levy low income threshold for the 2012/13 income tax year will increase to $20,542 for individuals and $32,279 for pensioners eligible for the Seniors and Pensioners Tax Offset.

The Medicare levy low income threshold for families for the 2012/13 income tax year will increase to $33,693, and the additional family threshold for each dependant child or student will increase to $3,094.

Net Medical expenses tax offset to be phased out

For those taxpayers who claim the NME tax offset in the 2012/13 income year they will continue to be eligible for the offset in the 2013/14 income tax year if they have out of pocket medical expenses above the relevant thresholds.

The relevant threshold for people with adjusted taxable incomes above $84,000 ($168,000 for couples) is $5,000 in out of pocket expenses and the rate of reimbursement is 10%. For those taxpayers who claim the NME tax offset in the 2013/14 income year they will continue to be eligible for the tax offset in the 2014/15 income year.

Income tax cuts deferred

Income tax cuts that had already been legislated (by way of increasing the tax free threshold) and that were due to commence on 1 July 2015 will be deferred indefinitely.

Replacing the Baby Bonus with new family payment arrangements

Family Tax Benefit Part A (FTB Part A) payments will be increased by $2,000, to be paid in the year following the birth of a first child, and $1,000 for a second and subsequent child. The additional FTB Part A will be paid as an initial payment of $500, with the remainder to be paid in seven fortnightly instalments.

As a result of these reforms the Baby Bonus will be abolished.

HECS-HELP discount and voluntary HELP repayment bonus discounts will end

From 1 January 2014, the following discounts relating to the Higher Education Loan Program will be removed:

• The 10% discount available to students electing to pay their student contribution upfront, and
• The 5% bonus on voluntary payments made to the Tax Office of $500 or more.

Work related self education expenses

From 1 July 2014, a taxpayer will only be able to claim a maximum deduction of $2,000 for work related self education expenses.

Eligible work related self education expenses include costs incurred on a course of study or other educational activity such as a conference or workshop, and include tuition fees, registration fees, textbooks, professional and trade journals, travel and accommodation expenses and computer expenses, where these expenses are incurred in the production of the taxpayer’s current assessable income.

Introduction of CGT Withholding Tax Regime for Non-resident taxpayers

From 1 July 2016, where a foreign resident disposes of taxable Australian property, the purchaser will be required to withhold and remit to the Tax Office 10% of the proceeds from the sale. This measure will apply to commercial property and residential property with a value over $2.5million.

SUPERANNUATION

Increase in concessional contributions cap 

A temporary cap of $35,000 (up from $25,000) will apply from 1 July 2013 for individuals aged 60 and over. The increased cap will apply for individuals aged 50 and over from 1 July 2014. 

The government will index the general cap of $25,000 that applies to everyone else from the 2015 financial year onwards. The increase in the cap to $35,000 will apply as follows:

Removal of $500,000 superannuation balance test

As a result of the above-proposed increase in the concessional contributions cap, the previously announced concessional contribution limit of $50,000 for individuals with superannuation balances below $500,000 will be removed.

Taxation of earnings on superannuation assets supporting income streams

From 1 July 2014, future earnings (such as dividends and interest) on assets supporting income streams will be tax free up to $100,000 a year (to be indexed in $10,000 increments), and the balance of earnings will be taxed at 15%.

Under the current law, all superannuation earnings on assets supporting superannuation pensions and annuities are tax-free.

The change to the taxation of superannuation funds in pension phase will undoubtedly punish good investment performance. For example, the Government announcement points out that “assuming a conservative estimated rate of return of 5%, earnings of $100,000 would be derived from individuals with around $2 million in superannuation”. However, if a superannuation fund earns 10%, then it will be subject to tax for assets that are at the $1 million level.

Special transitional rules for capital gains

• Special arrangements will apply for capital gains on assets purchased before 1 July 2014:

• For assets that were purchased before 5 April 2013, the reform will only apply to capital gains that accrue after 1 July 2024;
• For assets that are purchased from 5 April 2013 to 30 June 2014, individuals will have the choice of applying the reform to the entire capital gain, or only that part that accrues after 1 July 2014; and
• For assets that are purchased from 1 July 2014, the reform will apply to the entire capital gain.

The government is yet to release draft legislation with respect to this measure but the flow-on impact, if legislated, is likely to impact other areas. For example, if after 1 July 2014 you buy a capital asset in your superannuation fund, sit on it for 10 years, and then realise a $1 million gain to fund your pension as a one-off. 

Without further clarification from the government, it might be that averaging will apply to the capital gain, that is, $100,000 gain each year that the asset was held, thereby limiting tax exposure. Alternatively, $900,000 of the capital gain could potentially be taxed at a higher tax rate.

Tax relief for excess contributions

Many innocent people have been subject to a punitive rate of tax if they accidentally exceed their concessional contributions threshold. Individuals are taxed at 46.5% even if their personal tax rate is lower, where they have exceeded the cap. Moreover, if the excessive contribution was accidental, it has not been possible to withdraw the excess contribution and correct the error.

Pleasingly from 1 July 2013, it will be possible to withdraw the excessive contributions, be taxed at your ordinary rate with an interest charge on the benefit of a tax timing difference that arises because of the different tax payment dates of the superannuation fund.

Changes to government co-contributions

The government has introduced legislation to halve the co-contribution to $500 for eligible taxpayers.

The superannuation co-contribution matches eligible (after-tax) personal superannuation contributions made to a superannuation fund up to the maximum amount of $500. However, the government has recognised that this benefit is not as popular with the targeted group – lower income earners.

Increase in Superannuation Guarantee

The Superannuation Guarantee rate is gradually increasing from the current 9% to 12% by 1 July 2019 in 0.25% increments each financial year. From 1 July 2013, employer will be required to contribute 9.25% to superannuation.

The government has also increased the maximum age limit to 75 for when employers are required to make superannuation guarantee contributions for employees. Previously, employers were not required to make superannuation contributions on behalf of employees over the age of 70.

There are many other changes more specific to business, charities and not for profits, which we have documented in detail on the Prosperity Advisers Blog, 

Disclaimer: The information contained within this article is intended to be general in nature and should not be interpreted as individual advice. Please contact your financial adviser if you require specific information or advice.