2012 Federal Budget
by Mark Causer
On the 8th of May 2012, Treasurer Wayne Swan delivered his fifth (and some might predict his last) Federal budget. Falling out of this Budget are the usual announcements to which advisers and accountants must consult with their clients, to ensure that their personal circumstances are maximised for the following 2013 financial year and potentially beyond.
Given the impact that this year’s Budget places on Superannuation, therefore accumulation and retirement planning, we have placed a little more focus onto this area in this quarter’s newsletter.
It is also important not to lose perspective, in that any Budget announcement does not become law until it has passed through Parliament. With a majority ruling Government this is generally a fait de complet, but many would argue that the current Government is very unpopular and may well not be given the chance to serve another term in power.
This year’s highly anticipated Budget, in some circles referred to as the “battlers” Budget (several benefits squarely aimed at working families and low income earners, while seemingly taking from the wealthier section of the community) introduces several proposed changes that require many to take action to avoid unnecessary taxes.
From a political perspective, the Treasurer forecasted a return to (a small) surplus by the end of June 2013. This is in the backdrop of a $44 billion deficit for the 2012 financial year – materially more than had been previously expected.
Budget changes at a glance
Deferral of higher concessional contributions cap
From 1 July 2012, individuals over the age of 50 with superannuation balances below $500,000 were to have been able to make $50,000 of concessional contributions (before tax) each year. However, under the Budget changes, this has been deferred until 1 July 2014.
As a result, this will warrant a review of all superannuation salary sacrifice arrangements to ensure that your contributions for the 2013 financial year are within the reduced limits.
Additionally, there will be other superannuates who will be impacted whereby they have re-cycled pension income back into their superannuation account under the higher contribution caps, namely those people using the Transition-To-Retirement (“TTR”) strategy.
In some cases, it may even be appropriate to commute and repurchase a TTR pension with a lower account balance to avoid receiving surplus pension income payments which cannot be re-cycled under the lower caps, especially when the individual is under the age of 60yrs where some tax is still payable.
With this reduction likely to impact the overall performance of many superannuation accounts, those individuals with sufficient cash flow should consider taking full advantage of the current concessional contribution cap of up to $50,000 before 30 June 2012.
The table below outlines the contribution cap timeline.
Increase in contributions tax for high-income earners For those higher income earners amongst us earning more than $300,000 p.a., they will now be hit with a 30 percent contributions tax on concessional contributions made into superannuation.
The impact for this group who are over age 50 will be two fold, a halving of the amount of money they can contribute to super, and a doubling of the tax payable upon receipt of the contribution.
For this group, it will be very important to monitor income from all sources including non-super investment income. If this income is less than $300,000, but subsequent concessional contributions push the individual over the threshold, the increased tax rate will only apply to that part of the contribution that is in excess of the threshold.
For example, Tom earns $293,000 from salary / wages and non-super investment income. Tom has also been salary sacrificing to his superannuation account an amount of $25,000 each year, including $8,000 of superannuation guarantee paid by Tom’s employer.
The contributions tax payable on this contribution will now be $6,450 (that is, 15 per cent x $7,000 + 30 per cent x $18,000).
Overall however, superannuation still remains a tax effective, long term investment vehicle for this group of investors as the tax rate is still less than their marginal tax rate of 45%.
For those affected by this increased tax on their superannuation contributions, it may be time to discuss the merits of a Self Managed Super Fund (SMSF) and how this superannuation vehicle might benefit them moving forward.
SMSF and Contributions
In addition to this year’s Budget announcement regarding the reduction in contribution caps, SMSF trustees may be able to apply a strategy that allows them to materially increase their contributions ahead of the proposed changes.
In a recent determination (ID 2012/16) the Australian Taxation Office (ATO) confirmed that an SMSF trustee can allocate a contribution made before the end of the financial year to the next financial year.
In its simplest form, an SMSF member makes two contributions in June 2012, one for $50,000 and a second for $25,000 (being the new concessional limit for ALL super members) one could be allocated to the year ending 30 June 2012 and the other could be allocated to the year ending 30 June 2013.
The ATO also confirmed that the member could also claim a deduction for the full $75,000 on their personal income tax return for the year ending 30 June 2012.
There are a number of qualifiers that must be met before members can utilise this strategy and it is important that we discuss this in detail should the strategy be appropriate.
Tax changes to the employment termination payments
The current treatment of an employment termination payment (ETP) means that the tax payable on certain payments can be reduced, including remuneration packages containing payments that are not related to genuine hardship. An example of this would be a “golden handshake”. There are concessional rules to be applied to “transitional” ETPs that had been scheduled to expire on or before 30 June 2012.
Under the proposed changes, from 1 July 2012, tax concessions are only available to that part of an affected ETP that takes a person’s total annual taxable income (including the ETP value) to no more than $180,000. An amount in excess of $180,000 will be taxed at marginal tax rates.
This Budget measure will encourage people to consider the timing of when they might take their benefit. Deferring the ETP to a more suitable tax year might save you thousands in additional taxes.
One of the proposals in the Budget was the bonus payment to assist families with the costs associated with their child’s education. This new payment - the schoolkids bonus will replace the education tax refund system, paid through the taxation system.
Families will receive two instalments each year worth $410 for each child in primary school and $820 for each child in high school. These bonuses will be paid to help families meet education expenses for items such as uniforms, books, school excursions, stationery, music lessons and sports registration fees.
The schoolkids bonus will be available to families receiving family tax benefit Part A, plus young people in school receiving youth allowance and some other income support and veterans’ payments, on the test dates of 1 January and 30 June each year.
Although the changes to the tax thresholds were announced well ahead of this year’s Budget, please see below the tax table for the 2013 financial year. The major change is the increase in the tax free threshold, from $6,000 to $18,200 from 1 July 2012. For many this will represent a nice pay rise after 30 June 2012.
For higher income earners, the Flood Levy will also expire after 30 June 2012 as it was only introduced for the 2012 financial year.
Company tax rate reduction abandoned
The Government proposal to lower the company tax rate from 30% to 29% will not proceed. The reduction was proposed to commence from 1 July 2012 for small business companies and from 1 July 2013 for other companies.
Private Health Rebate
From 1 July 2012, the private health insurance rebate and the Medicare levy surcharge will be income tested against three new income tier thresholds. In line with the Budget delivering a tougher line to wealthier individuals, they will receive less private health insurance rebate or, if they do not have the appropriate level of private patient hospital cover, the applicable Medicare levy surcharge may increase.
The change is that from 1July 2012 the Private Health 30% rebate will be means tested (see table below), which means that if you fall into the top category (family income is greater than $260,000) you will lose the 30% rebate. Where your income is under the Tier 1 threshold, the Health Insurance Rebate changes do not affect you.
If your health rebate is set to change, you should consider paying your 2013 premium in advance and thereby maintaining the maximum 30% rebate.
Tax on interest
The proposed 50 per cent reduction of the first $1,000 of interest income for tax purposes has been abolished. Many have saved money in interest-bearing accounts, expecting that measure would help them manage their tax position. Unfortunately this measure has been abolished.
With interest and term deposit rates falling, this might be the catalyst for investors to review their investments and to consider re-investing into the sharemarket which has fallen back from historical highs, they offer alternative (and other) taxation advantages, such as dividend imputation.
Further, the strategy in ATO ID 2012/16 can be utilised to strengthen the tax position of the member in certain circumstances. It also allows for further scope when planning contributions. An SMSF’s trust deed is an important tool that will allow for this contribution strategy to happen.
No one can predict what will happen to the Budget announcements of 8 May 2012, that should they be passed into legislation in full, will they be unwound or overturned under a new Government. Therefore it is important to review ALL aspects and the finer detail of the proposed changes and take appropriate action to suit.
The simple truth this year is that if you take no action, this could well cost you many thousands of dollars!!
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