Last Hurrah for “Large” Super Contributions. Rush to top up before 30 June deadline. Those wishing to top up need to act now!!!

High income earners have been targeted in the recent Federal Government Budget. Maximum personal deductible superannuation contributions will be halved from 1 July 2009, and hobby farm tax deductions have been removed. Private health insurance rebates will be phasing out as income gets higher.

The Government pension is set to increase in September, together with a future increase in the Age Pension age, an extension of the First Home Owners boost, and from 2011 there will be the introduction of paid parental leave.

Superannuation
Reducing the Concessional Contribution caps
The concessional contributions cap is proposed to halve to $25,000 per annum with effect from the 2009-2010 financial year, limiting the ability to salary sacrifice into super for higher income earners. The transitional cap of $100,000 for those aged 50 or older is also being halved to $50,000 and will cut out from 1 July 2012 as originally planned.

Transition to Retirement pensions remain, however the strategy will be somewhat limited as a consequence of the above changes.

The annual cap on non-concessional contributions remains at $150,000 for 2009-2010. In the future, the cap will be calculated as six times the level of the indexed concessional contributions cap.

These changes don’t kick in until 1 July 2009, so there is still time in this financial year for those who want to make the maximum contributions using the existing limits.

Account-based pension – further drawdown relief
The minimum payment amounts for account-based pensions, will be halved for 2009-2010. That includes Allocated Pensions, Term Allocation Pensions and Transition to Retirement Pensions.

Temporary Reduction of the Government Co-contribution
The matching rate and maximum co-contribution payable will be reduced from 1 July 2009.

 

Taxation
Private Health Insurance Rebate – Incentive Tiers
Effective 1 July 2010 there will be three new income level tiers for applying a private health insurance rebate. Existing arrangements – a rebate of 30% of premiums – will remain unchanged for singles with less than $75,000 per annum and families with incomes of less than $150,000 per annum.

From 1 July 2009, the income definition for Medicare Levy Surcharge purposes has been altered so that high income earners won’t be able to salary sacrifice their way into the rebate or out of the Medicare Levy surcharge.

 

Extension of the First Home Owners Boost for six months
For contracts between 1 July 2009 and 30 September 2009 the First Home Owners Boost will continue to provide $7,000 for the purchase of established homes and $14,000 for the purchase of new homes. This means a total of $14,000 for established homes and $21,000 for new homes. For contracts between 1 October 2009 and 31 December 2009 the boost will provide $3,500 (a total of $10,500) for established homes and $7,000 (a total of $14,000) for new homes.

Employee Share Schemes (ESS)
The government has announced changes to the way employee share schemes are taxed removing the ability to defer the tax to a future year when the employee gains unrestricted access to the shares. Following considerable industry and media pressure this proposal is being reviewed and amendments are expected to be announced shortly.

The end of the Hobby Farm
From the 2009-2010 year, high income earners will be prevented from offsetting excess deductions from non-commercial business activities against salary and other income.

Taxpayers with an adjusted taxable income of over $250,000 will have excess deductions quarantined to the business activity, restricting the ability to claim losses for non-commercial activities such as lifestyle choices or hobbies. The existing rules continue to apply to those with ATI of $250,000 or less. Taxpayers will be able to apply to the ATO for relief if there are exceptional circumstances.

Increasing the Medicare levy low-income thresholds
The thresholds will increase to $17,794 for individuals (up from $17,309) and $30,025 for individuals in families (up from $29,207) from 1 July 2008. The additional amount for each dependent child will increase from $2,682 to $2,757.

The Medicare levy threshold for pensioners below Age Pension age will increase to $25,299 ensuring pensioners below Age Pension age do not pay Medicare levy when they don’t have a tax liability.

Special Disability Trusts
This measure ensures the unexpended income of a Special Disability Trust is taxed at the relevant beneficiary’s personal income tax rates rather than at the highest marginal rate.

The CGT main residence exemption will be extended to include a residence that is owned by a Special Disability Trust and used by the relevant beneficiary as their main residence from 1 July 2009.

Social Security
Increase to Pension Payments
The Government’s Secure and Sustainable Pension Reform will provide age, wife and disability support pensioners, carer payment recipients and veteran income support recipients with two primary payments:

• A base fortnightly rate of pension; and
• A Pension Supplement that includes the value of the current GST pension supplement, Pharmaceutical Allowance, Utilities Allowance and Telephone Allowance into one payment. This will be indexed twice a year in line with CPI.

From 20 September 2009, the new pension package will result in:

• An increase of $32.49 per week for single pensioners on the full rate of pension. This is made up of a $30 per week increase in the single basic pension rate and $2.49 in the new Pension Supplement.
• An increase of $10.14 per week (combined) for couple pensioners on the full rate of pension. This reflects an increase in the new Pension Supplement only.

Increase in Age Pension Age
The qualifying age for the Age Pension will gradually increase from 65 to 67 by 2023. The qualifying age for men and women will be increased by six months every two years, commencing 1 July 2017 and reaching 67 on 1 July 2023. Only new entrants to the pension system from 1 July 2017 will be affected. The qualifying age for the Veterans’ Service Pension will remain at 60. The table below highlights how the pension age will change.

 

Tighten the income test taper
From 20 September, the income test taper will increase from 40 to 50 cents in the dollar for a single pensioner and from 20 to 25 cents for each member of a couple, for income above the relevant income free threshold. The threshold is currently $138 per fortnight for single pensioners and $240 per fortnight for pensioner couples (combined).

The income test cut off threshold will reduce down from $47,444 to $38,693 for singles and from $72,423 to $59,228 for couples combined.

Existing part pensioners affected by the income test will have a transitional safety net apply allowing them to keep existing entitlements, maintained in real terms, plus an increase of $10.14 per week for singles or couples combined. They will continue to receive these existing entitlements, including the increase, until they are better off under the new pension rules.

New carer supplement
The Government will introduce a new carer supplement which will be ongoing and non-taxable. The first payment will be made by 30 June 2009 with subsequent payments starting from 1 July 2010.

The new supplement will provide:

• $600 per annum to all Carer Allowance recipients for each person being cared for; and
• $600 per annum to all Carer Payment recipients.

Those who receive the Carer Allowance and Carer Payments will be eligible for both payments. The existing Child Disability Assistance Payment of $1,000 per annum for carers who are paid Carer Allowance (child) will continue.

Closure of Pension Bonus Scheme and new ‘Work Bonus’ for Age Pensioners
The Government will close the Pension Bonus Scheme to new entrants on 20 September 2009. Existing members will continue to accrue entitlements under existing rules.

To continue to encourage workforce participation among older Australians, the Government will establish a new income test concession for employment income called a Work Bonus. Under the new Work Bonus, only 50% of the first $500 per fortnight of employment income will count for income test purposes. This will enable up to $250 of earnings to be excluded from means testing.

Family Tax Benefit Part A (FTB-A), Part B (FTB-B) and Baby Bonus
From 1 July 2009, Family Tax Benefit Part A payment rates will be indexed by Consumer Price Index (CPI).

The higher income thresholds for the following payments will remain fixed until July 2012:

• The FTB-B primary earner income threshold will remain fixed at $150,000;
• The income thresholds for receiving the dependency tax offsets will remain at $150,000;
• The Baby Bonus eligibility thresholds will remain at $75,000 of family income in the six months following birth or adoption (equivalent to $150,000 a year); and
• The higher income-free area of FTB-A will remain at $94,316 of family income (plus $3,796 for each child after the first). These thresholds would normally be indexed by CPI.

Paid Parental Leave
A Paid Parental Leave (PPL) scheme will be introduced for new parents who are the primary carers of a child born or adopted on or after 1 January 2011.

An eligible person will receive taxable PPL payments at the level of the Federal Minimum Wage, currently $543.78 a week, for a maximum period of 18 weeks. In most cases, the person will receive the payment through their employer. The Family Assistance Office will ensure that employers receive the required Government funds in advance of their making PPL payments.

To be eligible for the PPL scheme, the primary carer (usually the mother) must be in paid work and have:

• been engaged in work continuously for at least 10 of the 13 months prior to the expected birth or adoption of the child; and
• undertaken at least 330 hours of paid work in the 10 month period (an average of around one day of paid work a week).

An income test of $150,000 will apply based on the primary carer’s adjusted taxable income in the previous financial year. Go to www.facs.gov.au for more detailed information.

Andrew Condell

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Financial markets have provided much needed gains since early March with some confidence being restored. There is a growing view that the share markets may have bottomed in early March. This follows further deterioration in investment markets in January and February.

But what has happened to boost share market confidence? The economic data being released, particularly in the US suggests that although economic growth continues to be negative, the pace of economic contraction has eased. So, the global economy remains in recession however early signs of stabilisation are providing the impetus for investors to start buying stock again.

In the US, the economy shrank by an annualised rate of -6.1% in the March quarter, a similar level to the previous quarter. That is the third consecutive fall in GDP, the first time since the mid-1970’s. Major contributors to this recent fall were large falls in exports and a record drawdown in business inventory. The unemployment rate rose to 8.9% in April - the highest level in 25 years.

In Europe, the economic news and outlook is similar to the US. Unemployment in the region rose to 8.9% in March.

In Japan the news was mixed. The Japanese Tankan survey, measuring business sentiment, fell sharply during the March quarter. Conversely, industrial production rose during this period and Machine Orders increased in February.

In Australia, whilst retail sales fell during early 2009, the NAB Business Confidence Survey and the Business Conditions Survey rose. Housing finance approvals rose in January and February, thanks to a boost from the First Home Owners’ Grant and low interest rates.

Consumers were also in a more positive mood, with the Westpac/MI Index of Consumer Confidence rising 8.3% in April, thanks in part to recent fiscal stimulus and a rebound in equity markets.

The Reserve Bank of Australia (RBA) lowered interest rates by 25 basis points to 3.0% in April and kept rates at this level at their May board meeting. Australian unemployment increased in line with world trends. The unemployment rate rose to 5.7%, the highest since 2004.

The Governor of the RBA, together with the Prime Minister, conceded that the Australian economy is in recession, although more recent data shows that a technical recession has been avoided. What’s in a word? If it looks, smells and tastes like a recession then it’s fair to say it is one. However there have been some positive signs in recent months of a potential recovery. The RBA expects that these “green shoots” will lead to an economic recovery commencing late 2009. Things are clearly better than worst fears predicted.

The Australian share market has risen for a third consecutive month in May with the ASX climbing to 3817. This represents a 21% increase from a low in early March. The boost in confidence has also been an opportunity for companies to raise capital and repair their balance sheets. So far this year, companies have been very busy with capital raisings with $21billion in new capital being raised. Australia is now the third largest equity capital market in the world, behind the US and the UK.

 

Similar sharemarket rallies have occurred during the past few months in most major international share markets and emerging markets. The US share market has enjoyed a 3 month rally which saw the Down Jones Industrial Average gain 21 per cent over the past three months. This is the best three month rally since 1998.

While these recent market gains have been a welcome relief following an extended period of negative returns, there is still the possibility of further market falls. There is significant de-leveraging being carried out by companies and households. While this has the benefit of repairing “balance sheets” it reduces demand further exacerbating job losses. To combat this drag on the economy, stimulus is being provided by governments and central banks, targeting consumption and business investment. This will take some time to play out. In conclusion, the recent market rally is grounds for cautious optimism.

Brendan Gallagher

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