Overnight, the Federal Government handed down its annual budget. It contained the following key points related to retirement planning:
- No new taxes on superannuation were introduced
- The Assets Test thresholds and Assets Test taper rate were increased
- Changes to the indexation of the Age Pension and deeming thresholds were abandoned
- The former home rental income exemption for aged care residents was removed.
Other significant items include:
- A reduction in the small business tax rate
- An immediate tax deduction for small businesses
- The introduction of a single means-tested child care subsidy.
- GST on electronic downloads such as Netflix and iTunes
- Tax measures for large multi-national companies
In describing his second Federal Budget the Federal Treasurer, Joe Hockey said ‘This Budget is measured, fair and responsible’ and is designed to promote ‘jobs, growth and opportunity’.
The Federal Budget speech delivered an upbeat outlook for Australia’s economic future and confirmed a number of measures that had been announced pre-Budget.
For the second year running no new taxes on superannuation were introduced, however some changes have been made to the Age Pension. These measures will increase the number of people eligible for a full Age Pension but reduce the level of assets at which a part Age Pension is received.
A number of measures were introduced to encourage growth in small business, including a reduction in the company tax rate to 28.5%, and an immediate tax deduction for items valued less than $20,000.
Social security measures primarily deliver a range of changes for families including the introduction of a single child care subsidy which is means tested. This long-awaited child care reform will simplify access to child care with a focus on lower and middle income families, as well as families with disadvantaged children. In addition to these changes, the Government abandoned the changes to the indexing of the Age Pension and the resetting of the deeming thresholds.
A number of personal income tax measures aim to modernise taxation methods including changes to the tax deduction of car expenses, caps on fringe benefits and subjecting GST to offshore digital services, like Netflix, provided to Australian consumers. However other than the already announced proposal for a new tax aimed at approximately 30 multinational companies with global revenue of $1 billion or more that artificially avoid having a taxable presence in Australia. It will apply from 1 January, 2016. No other big ticket tax reform measures remain for consideration in the Tax Reform White Paper and pre-Budget speculation that a new 0.05% tax would apply to bank deposits of up to $250,000 was not included in the Budget measures.
Before any of these announcements can be implemented, they will require passage of legislation, which will remain challenging.
Early access for people with terminal Illness The Government will increase the life expectancy period for patients with a terminal illness to 24 months from 1 July 2015, providing earlier access to superannuation benefits.
Access will be granted where patients obtain certification from two medical practitioners (one being a relevant specialist) that they have a life expectancy period of less than 24 months, rather than 12 months at present.
Increase in supervisory levies
From 2015-16, the Government will increase the supervisory levies paid by financial institutions, over a four year period, to recover the cost of superannuation activities undertaken by the Australian Taxation Office (ATO) and Department of Human Services.
Reducing red tape on lost super
The Government will implement a package of measures from 1 July 2016 to reduce red tape for superannuation funds and individuals by removing redundant reporting obligations and by streamlining lost and unclaimed superannuation administrative arrangements. This will make it easier for individuals to find their lost and unclaimed superannuation.
Importantly the Treasurer reiterated that there will be ’no new taxes on superannuation under this Government’, affirming there will be no changes to preservation ages or taxation of superannuation, such as a tax on pension earnings or an increase in contribution-related taxes. However I note that there was no distinction between this Government and this term of Government.
Increase in Assets Test thresholds
From 1 January 2017, the Assets Test thresholds for the full pension will be increased. The current and proposed thresholds are detailed below:
Assets Test threshold for full pension(20 March 2015)
Assets Test threshold for full pension (1 January 2017)
An increase in the Assets Test thresholds for full pension means retirees can have a greater amount of assets (in addition to the family home) before their pension entitlement is reduced.
Increasing of the Assets Test taper rate
From 1 January 2017, the Assets Test taper rate will increase from $1.50 to $3.00, effectively reversing the 2007 decision to halve the taper rate at that time. The current and proposed thresholds are detailed below:
Assets Test threshold for part pension (20 March 2015)
Assets Test threshold for part pension (1 January 2017)
Pensioners who lose their pension entitlement on 1 January 2017 as a result of these changes will automatically be issued with a Commonwealth Seniors Health Card or a Health Care Card (for those under Age Pension age).
Impact of increase in Assets Test thresholds and taper rates on pensioners
- The proposed new taper rates and Assets Test thresholds mean some pensioners will receive a higher fortnightly pension, while others will see their pension reduced.
The following table approximates the level of assets above which the pension (under the Assets Test) will reduce due to the proposed measures compared to current entitlements.
Asset level above which pensions (under the Asset Test) are reduced due to the proposed measures (from 1 January 2017)
For those impacted there may be a more with favourable outcomes by considering strategies which reduce assessable assets. For example, under the proposed changes a strategy which reduces a client’s assessable assets by $100,000 will increase the entitlement under the Assets Test by $7,800 per annum (($100,000/$1,000) x 3 x 26) or 7.80% versus 3.90% under the current rules.
The higher Assets Test thresholds are also expected to increase the point at which a pensioner (with primarily financial assets) moves from being assessed under the Income Test to the Assets Test. This may provide advisers with the opportunity to consider strategies which help to reduce a client’s level of assessable income.
The increase in Assets Test thresholds will increase the Extra Allowable Amount (EAA) from 1 January 2017. The EAA is the difference between the homeowner and non-homeowner Assets Test thresholds and is used to determine whether a pensioner is a homeowner or non-homeowner under the retirement village and granny flat rules.
|Proposed EAA from 1 January 2017|
Impact on aged care residents
- Aged care residents with pensions reduced under the measures may see a reduction in their means-tested care fees (due to a reduction in overall assessable income), helping to minimise the impact of the new measures. Conversely, those who see an increase in their pension entitlements may see an increase in their annual means-tested care fees. The annual care fees may increase up to 50c for every $1 increase in their annual pension.
- Refundable Accommodation Deposits (RAD) are exempt assets under the Assets Test. The higher taper rate may lead to aged care residents being more likely to pay a RAD instead of a Daily Accommodation Payment (DAP) if the resident’s DAPs are based on an interest charge that is lower than 7.80% as calculated in the section above (currently DAPs are calculated as 6.36% of any outstanding accommodation payments – amounts not paid as a RAD).
- Similarly, new residents from 1 January 2017 may find it more attractive to ‘upgrade’ their accommodation and pay a higher RAD if the resident’s pension is still determined under the Assets Test after paying the RAD. Paying a higher RAD can also reduce means-tested care fees as RADs are not deemed under the aged care income assessment.
Pension indexation changes not proceeding
The Government has decided not to proceed with the proposed 2014-15 measure to link pension increases to inflation only. Payment rates will continue to be indexed under current arrangements by the higher of increases in the Consumer Price Index (CPI) or the Pensioner and Beneficiary Living Cost Index (PBLCI) and benchmarked against Male Total Average Weekly Earnings (MTAWE).
Deeming and Income Test threshold changes not proceeding
The Government will not proceed with the 2014-15 measures to reset the deeming thresholds and change the indexation of the pension Income Test thresholds and deeming thresholds.
The deeming thresholds remain $48,000 for singles and $79,600 for couples, and the pension Income Test thresholds and deeming thresholds will continue to be indexed annually by CPI.
Cap on defined benefit pension income deduction
The proportion of income that can be excluded from any Income Test (the deductible amount) will be capped at 10% from 1 January 2016.
Presently, some defined benefit members can reduce their assessable income, by up to half in some cases, by having a large proportion of their superannuation income excluded from the pension Income Test.
Recipients of Veterans’ Affairs pensions and/or defined benefit income streams paid by military superannuation funds are exempt from this measure.
Rental income exemption removed
The rental income exemption under the aged care means test, for aged care residents who are renting out their former home and paying their aged care accommodation costs by periodic payment, will no longer apply. This applies to new residents entering aged care from 1 January 2016.
It is a common strategy to rent out the former home, when the aged care resident is paying their accommodation cost by periodic payment, to receive an indefinite exemption for the former home under the Age Pension Assets Test. Advisers will now need to consider the impact the rental income will have on aged care fees.
Increasing consumer choice for home care
From 1 February 2017, Home Care Packages will be allocated directly to consumers by the My Aged Care Gateway. The My Aged Care Gateway will be responsible for prioritising clients’ access to packages at the regional level within the number of packages allocated through the planning ratio, enabling aged care recipients to receive services from a provider of their choice, including the ability to change services.
Personal income tax
Increase to Medicare levy low-income thresholds
The Government will increase the Medicare levy low-income threshold for families from the 2014-15 financial year. The threshold for couples with no children will be increased to $35,261 per annum and the additional amount of threshold for each dependent child or student will be increased to $3,238 per annum.
The increase in these thresholds takes into account movements in CPI. There will also be an increase to the annual Medicare Levy low-income thresholds for individuals ($20,896) and pensioners ($33,044).
Changes to claiming a tax deduction for car expenses
The Government will modernise the methods of calculating work-related car expenses from the 2015-16 financial year. In doing so the ‘12% of original value method’ and the ‘one third of actual expenses method’, will be removed. The cents-per-kilometre rate will be modernised by replacing the three current rates based on engine size with a single rate of 66 cents per kilometre. In addition they will retain the ‘logbook method’ of calculating expenses. The Government has indicated this will not impact leasing and salary sacrifice arrangements.
Removal of an income tax exemption for Government employees
From 1 July 2016, the Government will remove the income tax exemption that is available to Government employees who earn income while delivering Official Development Assistance overseas for more than 90 continuous days. In doing so, foreign earnings income will be treated as assessable income in Australia.
The exemption will continue to apply to Australian Defence Force and Australian Federal Police personnel who deliver official Development Assistance for a charity or private sector contracting firm.
Zone Tax Offset changes
From 1 July 2015, the Government will exclude ‘fly-in fly-out’ and ‘drive-in drive-out’ workers from the Zone Tax Offset where their normal residence is not within a zone. The Zone Tax Offset applies to individuals in recognition of the isolation, uncongenial climate and high cost of living associated with living in identified locations. Eligibility is based on defined geographical zones.
Increase in Commonwealth penalty rates
The Government will increase the value of all Commonwealth penalty units from $170 to $180, with effect from 31 July 2015. This increase is broadly consistent with inflation since the value was last adjusted in December 2012. The Government will also introduce ongoing indexation of penalty units based on CPI. Indexation will occur on 1 July every three years, with the first indexation occurring on 1 July 2018. For example, these penalty rates apply to administrative penalties issued by the ATO to self-managed superannuation funds (SMSFs) for Superannuation Industry (Supervision) Act 1993 contraventions.
Tax changes for those temporarily working in Australia
From 1 July 2016, the Government will change tax residency rules to treat most people who are temporarily in Australia for a working holiday as non-residents for tax purposes, regardless of how long they are here for. Currently, where a holiday maker becomes a tax resident they are taxed based on resident tax rates, rather than the non-resident rates which is 32.5% from the first dollar of income.
Capping of FBT-exempt meals and entertainment
From 1 April 2016, the Government will introduce a single grossed up cap of $5,000 for salary sacrificed meal entertainment and entertainment facility leasing expenses (meal entertainment benefits) for employees of not-for-profits. In cases where the meal entertainment benefits exceed the new grossed up cap, it can also be counted towards their existing fringe benefits tax exemption or rebate cap. This means that all use of meal entertainment benefits will become reportable.
Employee share schemes
The Government will implement a variety of measures to take effect from 1 July 2015 that affect employee shares schemes. The measures are designed to make these schemes more attractive and accessible for all companies in Australia, and provide additional tax assistance to eligible companies through a start-up concession.
In summary the measure will:
1) exclude eligible venture capital investment from the aggregated turnover test and grouping rules (for the start-up concession)
2) provide the capital gains tax discount to employee share scheme interests that are subject to the start-up concession, where options are converted into shares and the resulting shares are sold within 12 months of exercise, and
3) allow the Commissioner of Taxation to exercise discretion in relation to the minimum three year holding period where there are circumstances outside the employees control that make it impossible for them to meet this criterion.
HELP – Recovery of repayments from overseas debtors
From the 2016-17 financial year, HELP debtors residing overseas for six months or more will be required to make HELP repayments if their worldwide income exceeds the minimum repayment threshold.
GST for imported digital products and services
From 1 July 2017, offshore supplies of digital services and intangibles to Australian consumers will be subject to GST.
Although there have been a number of small changes to personal taxation, importantly there have been no changes to marginal income tax rates or thresholds and no extension of the budget repair levy. In addition, pre-Budget speculation that a ‘deposit tax’ on savings held in a bank account would be introduced were not included in the Budget measures.
Small business taxation
Tax cuts for small business
From the 2015-16 financial year, the Government will reduce the company tax rate to 28.5% for companies with aggregated annual turnover less than $2 million. Companies with an aggregated annual turnover of $2 million or above will continue to be subject to the current 30% rate on all their taxable income.
The current maximum franking credit rate for a distribution will remain unchanged at 30% for all companies, maintaining the existing arrangements for investors.
From 1 July 2015 the company tax rate for small business will reduce to 28.5%.
Individual taxpayers with business income from an unincorporated business that has an aggregated annual turnover of less than $2 million will be eligible for a small business tax discount. The discount will be 5% of the income tax payable on the business income received from an unincorporated small business entity. The discount will be capped at $1,000 per individual for each income year, and delivered as a tax offset.
This lowering of the tax rate was an expected measure to encourage small business investment in difficult economic times. The Government hopes that the difference between the tax rates is great enough to benefit small business but also low enough to incentivise small businesses to grow. It is interesting that the Government has left the franking credit rate at 30% for all companies, allowing small business owners to maintain the higher level of tax advantages associated with franked dividends.
Capital gains tax roll-over relief for changes to entity structure
The Government will allow small businesses with an aggregated annual turnover of less than $2 million to change legal structure without attracting a capital gains tax (CGT) liability at that point. This measure will be available for businesses that change entity type from the 2016-17 financial year.
CGT roll-over relief is currently available for individuals who incorporate but all other entity type changes have the potential to trigger a CGT liability. This measure recognises that new small businesses might choose an initial legal structure that they later find does not suit them when the business is more established.
Changes to the fringe benefits tax system for work-related electronic devices
The Government will allow a fringe benefits tax (FBT) exemption from 1 April 2016 for small businesses with an aggregated annual turnover of less than $2 million that provide employees with more than one qualifying work-related portable electronic device, even where the items have substantially similar functions.
Currently, an FBT exemption can apply to more than one portable electronic device used primarily for work purposes, but only where the devices perform substantially different functions. Removing the restriction that a tax exemption is only provided for one work-related portable electronic device of each type will remove confusion where there is a function overlap between different products (such as between a tablet and a laptop).
Immediate tax deduction for items valued less than $20,000
Small businesses with aggregate annual turnover of less than $2 million can immediately deduct assets they start to use or install ready for use, provided the asset costs less than $20,000. This will apply for each asset acquired and installed ready for use between 7.30pm (AEST) 12 May 2015 and 30 June 2017. Assets valued at $20,000 or more (which cannot be immediately deducted) can continue to be placed in the small business simplified depreciation pool (the pool) and depreciated at 15% in the first income year and 30% each income year thereafter. The pool can also be immediately deducted if the balance is less than $20,000 over this period (including existing pools).
The Government will also suspend the current ‘lock out’ laws for the simplified depreciation rules (these prevent small businesses from re-entering the simplified depreciation regime for five years if they opt out) until 30 June 2017. From 1 July 2017, the thresholds for the immediate depreciation of assets and the value of the pool will revert back to existing arrangements.
Immediate deductibility for professional expenses
From the 2015-16 financial year, the Government will allow businesses to immediately deduct a range of professional expenses associated with starting a new business, such as professional, legal and accounting advice. Currently, some professional costs associated with a new business start-up are deducted over a five year period.
Accelerated depreciation of assets for primary producers
The Government will allow all primary producers to immediately deduct capital expenditure on fencing and water facilities such as dams, tanks, bores, irrigation channels, pumps, water towers and windmills.
The Government will also allow primary producers to depreciate over three years all capital expenditure on fodder storage assets such as silos and tanks used to store grain and other animal feed.
These changes will be for income years commencing on or after 1 July 2016. Currently, the effective life for fences is up to 30 years, water facilities is three years and fodder storage assets is up to 50 years.
The Government will not proceed with the previously announced but unenacted measure to replace the current GST-free treatment for supplies of going concerns and farmland with a reverse charge mechanism.
Restart wage subsidy
From 1 July 2015, payments for the Restart Subsidy will be more accessible by allowing employers to receive the subsidy amount of $10,000 progressively over 12 months, rather than the current 24 months.
Since 1 July 2014, Restart provided support to employers who employ and retain eligible job seekers who are 50 years of age or older, and who have been unemployed and on income support for six months or more. Currently, an employer will receive up to $10,000 (GST inclusive) in assistance for a full-time employee over two years.
From 1 July 2015, the Government will exclude new claimants of Widow Allowance from the One-Week Ordinary Waiting Period (OWP). This proposal amends the 2014-15 Budget measure to apply an OWP to all working age payments, which included Widow Allowance, from 1 January 2015.
Cessation of the Large Family Supplement
From 1 July 2016, the Government will cease payment of the additional Family Tax Benefit (FTB) Part A Large Family Supplement.
The Large Family Supplement is a component of FTB Part A that is paid for the third and each subsequent FTB child in a family. From 1 July 2015, the Large Family Supplement will only be paid to families with four or more children and will cease altogether from 1 July 2016.
FTB Part A – reduced portability
From 1 January 2016, the Government will reduce the amount of time FTB Part A will be paid to recipients who are outside Australia. Currently, FTB Part A recipients who are overseas are able to receive their usual rate of payment for six weeks and then the base rate for a further 50 weeks. Families will only be able to receive FTB Part A for six weeks in a 12 month period while they are overseas.
Pensions – tightening proportionality
From 1 January 2017, the Government will reduce from 26 weeks to six weeks the period that recipients of the Age Pension, Wife Pension, Widow B Pension and the Disability Support Pension can be paid their full basic means-tested rate while overseas. After six weeks absence from Australia, pensioners who have lived in Australia for less than 35 years will be paid at a reduced rate proportional to their period of Australian Working Life Residence (AWLR). The AWLR is the period a person has lived in Australia, as a permanent resident, between the age of 16 years and Age Pension age.
Pensioners overseas on the date of implementation will not be affected by this change unless they return to Australia and make a subsequent trip overseas. Pensioners with an AWLR of 35 years or more, or who are exempt from proportionality rules, such as recipients of the Disability Support Pension who are terminally ill or severely impaired and certain Widow B Pension and Wife Pension recipients, will not be affected.
Increasing the age of eligibility for Newstart Allowance and Sickness Allowance
From 1 July 2016, the Government will increase the age of eligibility for Newstart Allowance and Sickness Allowance from 22 to 25 years of age. Current recipients of Newstart Allowance and Sickness Allowance, aged 22 to 24 years of age on 30 June 2016, will remain on those allowances. This proposal delays the 2014-15 Budget measure (yet to be legislated) by extending the implementation date from 1 January 2015 to 1 July 2016.
Revised waiting period for youth income support
From 1 July 2016, the Government will require young people under 25 years of age without significant barriers to employment to actively seek work for a four week waiting period before receiving income support payments.
Under this proposal, all new claimants of Newstart Allowance, Youth Allowance (Other) and Special Benefit under 25 years of age and who are eligible for a Stream A in jobactive, will be subject to a new rapid activation strategy, RapidConnect Plus, that will require the claimant to undertake a number of additional job search activities within the first four weeks before they receive income support.
Cessation of the Low Income Supplement
From 1 July 2017, the Government will cease payment of the Low Income Supplement. Currently a Low Income Supplement of $300 per year is paid to people whose income was below certain thresholds and who did not receive a pension or benefit from the Australian Government for more than 39 weeks in the previous financial year.
Introduction of a single Child Care Subsidy
From 1 July 2017, the Government will replace the Child Care Benefit, Child Care Rebate and the Jobs, Education and Training Child Care Fee Assistance programs with a new, single, means-tested Child Care Subsidy (CCS).
Families meeting the activity test with annual incomes up to $60,000 will be eligible for a subsidy of 85% of the actual fee paid up to an hourly fee cap. The subsidy will taper to 50% for eligible families with annual incomes of $165,000.
The hourly fee cap in 2017-18 will be set at $11.55 for long day care, $10.70 for family day care, $10.10 for outside school hours care and $7.00 for a nanny in a child’s home (pilot program from 1 January 2016). The hourly caps will be indexed by CPI.
Eligibility will be linked to a new activity test to better align receipt of the subsidy with hours of work, study, or other recognised activities.
The CCS will have no annual cap for families with annual incomes below $180,000. For families with annual incomes of $180,000 and above the CCS will be capped at $10,000 per child per year.
The income threshold for the maximum subsidy will be indexed by CPI with other income thresholds aligned accordingly.
Increase in Pharmaceutical Benefits Scheme safety net threshold
The Government will extend the increase to the Pharmaceutical Benefits Scheme (PBS) safety net thresholds by one additional year in 2019. This builds on the 2014-15 Budget measure to increase the PBS safety net thresholds for four years from 1 January 2015.
Removing double-dipping from Paid Parental Leave
From 1 July 2016, the Government will remove the ability for individuals to take Parental Leave Pay (PLP) from the Government in addition to any employer-provided parental leave entitlements. Currently individuals can double dip, by taking payments from both the Government and their employer.
The Government will ensure that all primary carers would have access to parental leave payments that are at least equal to the maximum PLP benefit (currently 18 weeks at the national minimum wage).
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.
The information contained in this document dated 13 May 2015 has been given in good faith and has been derived from laws current at this date and our interpretation of them. It has also been devised from the 2015 Federal Budget Papers, Ministerial statements, associated materials, and our interpretation of them. The taxation position described is a general statement and should only be used as a guide. It does not constitute tax advice. This document is to be used as general information only and should not be considered a comprehensive statement on any matter and should not be relied upon as such. This document has been prepared without taking into account any individual objectives, financial situation or needs. No member of Equitas Wealth, Westpac Group, or the BT Financial Group, nor any of their employees or directors gives any warranty of accuracy or reliability nor accepts any liability in any other way, including by reason of negligence for any errors or omissions contained herein, to the extent permitted by law. It is important to note that the policies discussed here are yet to be passed as legislation and therefore may be subject to change or further refinement. This disclaimer is subject to any contrary requirement of the law.