Well again the Federal Budget came and went last night. As with all recent Labor Budgets, there were no surprises announced by Wayne Swan as the key elements have been announced over the past few weeks, including the deficit (as if we didn’t know that company profits were going to be down).
Our take out is that the Government is faced with the challenges of bringing the budget back to surplus, meeting the demands of the Independents and Greens to get any legislation passed, and adhering to their own philosophy of wealth distribution combined with an economy that is doing OK in some sectors and struggling in others – and ultimately winning an election (which seems remote at this stage). Below you will find some details and comments that may be relevant to you from last night.
Before any of these announcements can be implemented, the Government will need to get them through the Parliament. Which brings us to an important point: there are five scheduled weeks of sitting between now the election date of September 14. For these measures to pass the legislation has to be drafted, and pass both houses of Parliament.
In a practical manner this has to be done by June 30, as there are no scheduled sitting days from July until the election date. So this seems unlikely. However the Government may try to push through some aspects, such as the increase in Medicare levy to help fund the proposed National Disability Insurance Scheme (also yet to be legislated) and potentially the changes to school funding known as the Gonski Reforms. For these to be passed they would need the support of the Independants in the lower house and the Greens in the Senate. This is possible because, for all their rhetoric, the Independents appear to agree to everything Labor puts forward.
Probably the most disappointing aspect from my point of view is the lack of focus on those who are or strive to be self-reliant, such as further changes to superannuation and nothing for business which after all is the driver of the economy. It is a budget of dividing up the pie as opposed to creating an environment to increase the pie – which after all is Labor’s philosophy.
Whilst most measures will need legislation to be introduced, it is important to have a plan in place to maximise existing opportunities and to be positioned appropriately for any potential changes. If you have any questions about how the Budget or other Government measures may impact you or your family please do not hesitate to call Rob MacLean on 02 9492 0444.
Extending concessional tax treatment to deferred lifetime annuities
Deferred lifetime annuities (DLAs) will be eligible for the same concessional tax treatment that superannuation assets supporting superannuation income streams receive, from 1 July 2014. This reform will provide retirees with more choice by allowing them to allocate part of their superannuation to a product that will provide an ongoing income stream for life beyond a certain age.
DLAs are a form of longevity insurance offered in many countries, but not in Australia, due to unintended unfair taxation treatment. In contrast with immediate annuities, DLAs begin payments after a deferral period, usually some years after purchase. For example, purchase at age 65 to begin payments for life at age 85. They can free up retirees to focus on investing the balance of super for the period between retirement and the beginning of DLA payments.
The existing laws require that income steams must make payments at least annually. As a DLA does not meet this requirement, they do not qualify as an income stream and therefore do not receive the same concessional tax treatment that applies to earnings on superannuation assets supporting income streams and the benefits paid after age 60.
This measure will provide DLAs with the same concessional tax treatment that other retirement products currently receive. The Coalition has also indicated it wants to encourage the uptake of DLAs and will have its own policy plans before the Federal election in September.
Tax exemption for earnings on superannuation assets supporting income streams
Currently, all earnings (such as dividends, interest and capital gains) on assets supporting income streams are tax-free. This is in contrast to earnings in the accumulation phase of superannuation which are taxed at 15 per cent.
The Government proposes from 1 July 2014, earnings on assets supporting income streams will be tax-free up to $100,000 per year. Earnings above $100,000 per year will be taxed at a rate of 15 per cent. The $100,000 will be indexed to CPI and increase in $10,000 increments.
Earnings will include interest, dividend and rental income but special rules will apply to capital gains depending on when the asset was acquired.
Special arrangements will apply for capital gains on assets purchased before 1 July 2014. This will cause the Capital Gains Tax (CGT) treatment of assets supporting income streams to have a three tiered structure over the next 10 years so that for:
- Assets that were purchased before 5 April 2013, the reform will only apply to capital gains that accrue after 1 July 2024;
- 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
- Assets that are purchased from 1 July 2014, the reform will apply to the entire capital gain.
Capital gains that are subject to the tax will receive the 33 per cent discount, and will therefore be taxed at a rate of 10 per cent.
The Government has said it will ensure that members of defined benefit funds will be equally impacted by this change as members of accumulation funds. This will be achieved by calculating a notional earnings for each year a defined benefit member is in receipt of a concessionally taxed superannuation pension.
This could be a very complex measure to administer and there are a range of unknowns at this stage; including how this 15 per cent tax will be collected. Many retirees have multiple pension/annuity funds making it difficult to administer at fund level. If levied to the individual, new processes will need to be put in place by the ATO to consolidate information, calculate the tax and levy the bill.
Some other unresolved questions include:
- If capital losses in one fund or investment option will be able to be offset against capital gains in another fund or investment option; and
- How the capital gains component of managed fund distributions will be treated within the transitional rules.
The Government estimates that this measure will only affect 16,000 superannuation members who are estimated to have superannuation balances of $2 million and over. However, when capital gains are taken into account further down the track, those will smaller balances may also be impacted.
Importantly, this measure does not impact on lump sum withdrawals from super and pension accounts from age 60 which remain tax free.
Increasing the concessional caps for certain superannuation members
The concessional contribution is proposed to increase to $35,000 (unindexed) for:
- People aged 60 and over from 1 July 2013
The general concessional cap is expected to reach $35,000 by 1 July 2018 as a result of indexation.
This will replace the Government’s previous proposal of a higher cap for those aged 50 or more with superannuation balances below $500,000.
This will be a welcome change as it will allow those close to retirement to salary sacrifice more to super. This includes individuals utilising a transition to retirement strategy which will in many cases become more tax effective and lead to greater retirement balances.
The Government has already released draft legislation for consultation. The cap of $35,000 is proposed to apply for individuals aged 59 years or over on 30 June 2013 for the 2014-15 financial year and individuals aged 49 years or over for the 2014-15 financial years and later years. This means that those aged 59 or over on 30 June this financial year will be able to contribute and/or salary sacrifice an additional $10,000 as concessional contributions in the 2014-15 financial year.
Using the age of individuals on 30 June the previous financial year makes it easy to determine which clients qualify for the higher cap. It also provides clarity that the higher cap will apply for those who turn 60 or 50 in a particular year but pass away before their birthday.
The Coalition has indicated support for this measure which means there is the possibility it will be legislated before the election.
Changes to the excess contributions tax system
Excess contributions made from 1 July 2013 will be taxed at an individual’s marginal
tax rate (MTR), plus an interest charge to recognise that tax on excess concessional contributions is collected at a later date than normal income tax. Additionally, individuals will be able to withdraw the excess contribution from their superannuation fund.
The result of these changes is that an excess concessional contribution will be taxed in the same way that a non-concessional contribution would have been taxed plus an interest charge.
This will be welcomed as it will provide tax savings for those people that exceed their concessional contributions cap and are not on the highest marginal tax rate. Clients that are already on the highest marginal tax rate, however, will have a slightly higher tax liability as a result of the interest charge.
This measure will be much more flexible than under the current rules where refunds are limited to excess contributions of less than $10,000 and only on a once off basis.
Excess non-concessional contributions will continue to be taxed at the highest marginal tax rate.
Minor amendments to the reduction of higher tax concession for contributions of high income earners
The Government has previously announced as part of the 2012-13 Budget measures that individuals with income greater than $300,000 will be subject to 30 per cent tax on certain non-excessive concessional contributions rather than the 15 per cent rate from 1 July 2012.
The Government proposes to make minor amendments which include:
- Using a similar definition of income to that used for calculating whether an individual is liable to pay the Medicare Levy Surcharge;
- Exempting employer contributions for Federal Judges sitting on or after 1 July 2012 who are entitled to a benefit payable under the Judges Pension Act 1968, and employer contributions made to constitutionally protected funds for State higher level office holders sitting on or after 1 July 2012;
- Refunding former temporary residents the tax paid under the measure as they don’t receive concessional tax treatment on their contributions to super as the result of the operation of other rules.
Draft legislation was released for public consultation with submissions due 8th May 2013 leaving little time for the legislation to be introduced and passed through Parliament before 30 June 2013, considering this measure applies for the 2012-13 financial year.
The proposed assessment and payment of the additional tax is similar to that which applies to excess concessional contributions in that a notice is to be issued to the individual along with a release authority. The individual will be able to pay the tax personally, pay personally and seek reimbursement from their superannuation fund, or provide a release authority to their superannuation fund to remit to the Commissioner.
Low income Superannuation Contribution – technical amendment
The Government will amend the eligibility criteria for the low income superannuation contribution (LlSC) to now pay individuals with an entitlement below $20. The LlSC was previously not paid if it would be less than $20. Entitlements under $10 will be rounded up to $10.
The LISC is a refund of up to $500, the tax paid on superannuation concessional contributions for people with adjusted taxable income up to $37,000.
Charter of Superannuation Adequacy and Sustainability and Council of Superannuation Custodians
The Government has proposed to establish a Council of Superannuation Custodians to ensure that future changes to superannuation are consistent with a Charter of Superannuation Adequacy and Sustainability.
The Council will be responsible for assessing future superannuation policy changes against principles of certainty, adequacy, fairness and sustainability. The Council will provide an annual report on the superannuation system that will be tabled in Parliament.
Extending normal deeming rules to superannuation account based income streams
The Government proposes extending to account-based income streams the Centrelink deeming rules that currently apply to financial investments such as bank deposits, shares and managed funds.
Currently, the first $45,400 for a single pensioner and $75,600 for a pensioner couple of financial investments is deemed at 2.5 per cent per annum. Any financial investments over these thresholds are deemed at 4 per cent per annum.
This is to apply to account based pensions that commence on or after 1 January 2015. All products held by pensioners before 1 January 2015 will be grandfathered indefinitely and continue to be assessed under the existing (deductible calculation) rules unless they choose to change products.
This measure may open up opportunities in the lead up to 1 January 2015 depending on whether you are better off under the existing rules or deeming and when (if under current rules),you may be advantaged by moving to new rules. This position can change over time depending on a person’s level of assets and how much income is being received from the account based pension.
Retirees with assets at the lower end of the scale will most likely be affected.
Housing Help for Seniors pilot
On 1 July 2014, a pilot will commence to trial a means test exemption for Age Pension recipients who are downsizing from their family home. The trial period will be closed from 1 July 2017.
The family home must have been owned for at least 25 years with at least 80 per cent of excess proceeds from the sale (up to $200,000) to be deposited into a special account by an authorised deposit taking institution. These funds (plus earned interest) will be exempt from pension means testing for up to 10 years provided there are no withdrawals during the life of the account.
The exemption will also be accessible to individuals assessed as home owners who move into a retirement village or granny flat. It will not be available to individuals moving into residential aged care.
This will encourage individuals to move into housing that is more suited to their needs as they age, without being concerned that they will lose some, or all, of their pension.
While this will support individuals who want to downsize their home, the withdrawal restriction will effectively lock up the proceeds.
Although this will not be available to individuals moving into residential aged care, there are product solutions available such as annuities and insurance bonds held within a trust which can reduce the effect of the proceeds on their pension.
Medicare Levy to increase to 2%
The Government has proposed to increase the Medicare levy from 1.5% to 2% from 1 July 2014. This reform will fund the national disability insurance scheme, to be known as ‘DisabilityCare Australia’ and the money raised from the increase in the Medicare levy will be placed into the DisabilityCare Australia Fund for 10 years, to be spent funding the additional costs of DisabilityCare Australia.
Low income earners will continue to receive relief from the Medicare levy through the low income thresholds for singles, families, seniors and pensioners. The current exemptions from the Medicare levy will also remain in place, including for blind pensioners and sickness allowance recipients.
Increase to Medicare levy low income thresholds
The Medicare levy low income threshold for the 2012-13 financial year will increase to:
- $20,542 for individuals
- $32,279 for pensioners eligible for the Seniors and Pensioner Tax Offset
- $33,693 for families and the additional family threshold amount for each dependent child or student will increase to $3,094.
Net medical expenses tax offset phase out
The Government will phase out the net medical expense tax offset (NMETO) with transitional arrangements for those currently claiming the offset.
The NMETO will continue to be available for taxpayers for out of pocket medical expenses relating to disability aids, attendant care or aged care expenses until 1 July 2019 when DisabilityCare Australia is fully operational and aged care reforms have been in place for several years.
From 1 July 2013, those taxpayers who claimed the NMETO for the 2012-13 financial year will continue to be eligible for the offset in the 2013-14 financial year if they have out of pocket medical expenses above the relevant thresholds. Similarly, those who claim the NMETO in the 2013-14 financial year will continue to be eligible in the 2014-15 financial year.
The NMETO can substantially increase the amount of income a resident in an aged care facility is able to receive without incurring a tax liability. Particularly when they are renting their former home or have sold the home and the investments are generating considerable taxable income.
The potential loss of the NMETO will need to be conasidered by those moving to residential aged care, however, there is some time before this measure is proposed to come into effect.
Deferral of the 2015-16 tax cuts
The income tax cuts scheduled to commence 1 July 2015 as part of the Clean Energy package will be deferred due to revisions in carbon price projections from 2015-16 onwards. The tax free threshold was to increase from $18,200 to $19,400.
The tax cuts were intended to provide assistance for a projected increase in the carbon price to
$29 in 2015-16, from the fixed price of $25.40 in 2014-15. As the carbon price in 2015-16 is now projected to be lower than $25.40, these tax cuts will be deferred until the estimated carbon price in the Budget reaches $25.40.
Changes to work-related self-education expenses
From 1 July 2014, taxpayers will be able to claim a tax deduction of up to $2,000 of education expenses in an income year. Deductible education expenses are costs incurred in undertaking a course of study or other education activity, such as conferences and workshops, and include tuition fees, registration fees, student amenity fees, textbooks, professional and trade journals, travel and accommodation expenses, computer expenses and stationery, where these expenses are incurred in the production of the taxpayer’s current assessable income.
Employers are generally not liable for fringe benefits tax for education and training they provide or fund for their employees, in order to support employers investing in the skills of their workers. This treatment will be retained, unless an employee salary sacrifices to obtain these benefits.
Monthly PAYG instalments – extension to other large entities
The Government will extend the requirement to make monthly Pay As You Go (PAYG) income tax instalments to include all large entities in the PAYG instalment system. This will include superannuation funds, trusts, sole traders and large investors which will result in their payment of tax being brought forward.
Non-corporate entities with turnover of $20 million or more will move to monthly PAYG instalments from 1 January 2017.
Preventing ‘dividend washing’ opportunities
The Government will close a loophole that enables sophisticated investors to engage in ‘dividend washing’ from 1 July 2013. Currently, sophisticated investors can engage in ‘dividend washing’ to in effect trade franking credits. This can result in some shareholders receiving two sets of franking credits for the same parcel of shares.
The measure would ensure that when an investor engaged in ‘dividend washing’ by selling shares with a dividend and then immediately buying equivalent shares that still carried a right to a dividend, they would only be entitled to use one set of franking credits.
The changes would be targeted to the two day period after a share goes ex dividend.