Last night the Federal Treasurer, Wayne Swan described his sixth Federal Budget as a ‘sensible, calm and responsible approach that puts jobs first’.
The 2013/14 Federal Budget will be not be the most memorable. However, there are $43 billion worth of savings to drive the Budget into surplus by 2016/17.
Many of the key announcements were released pre-budget and confirmed by the Government in the budget papers. These include the superannuation tinkering limiting tax deductions for self education expenses and increasing the medicare levy by 0.5% to 2%.
Personal Tax Changes
The Government has announced it will defer the tax cuts that were due to come into effect from 1 July 2015. As a result, the marginal tax rates are proposed to remain at their current settings. Therefore the current 2012-2013 tax rates will continue to apply and the 2015-2016 rates will be deferred.
As a result of these changes taxpayers earning up to $35,000 will have the maximum tax cut of $228 deferred until some future date yet to be announced. Taxpayers earning $80,000 or over will be unaffected by this change.
Increase in the Medicare Levy from 1 July 2014
The Government has confirmed that it will increase the Medicare Levy by half a percentage point from 1.5% to 2% from 1 July 2014 to provide funding for DisabilityCare Australia.
Draft legislation to give effect to this change has already been released. 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 exemption from the Medicare Levy will also remain in place, including for blind pensioners and sickness allowance recipients.
While this announcement will increase the amount of Medicare Levy people will pay on their taxable income, it will also increase the tax rates applicable to other amounts that include the Medicare Levy rate. These include:
- Excess non-concessional contributions tax – 46.5% to 47%
- Tax on the taxable component of a superannuation lump sum benefit received by a taxpayer age 55 to 59 in excess of the low rate cap (currently $175,000) – 16.5% to 17%
- Tax on the taxable component of a superannuation lump sum benefit received by a taxpayer under the age of 55 – 21.5% to 22%
- Tax on the taxable component of a superannuation lump sum death benefit paid directly to a non-death benefits dependent – taxed element – 16.5% to 17% and untaxed element – 31.5% to 32%
- Withholding tax on financial investments where no TFN is provided – 46.5% to 47%
- Fringe benefits tax – 46.5% to 47%.
The increase in the Medicare Levy may also improve the tax effectiveness of a
number of strategies. These include:
- making salary sacrifice and personal deductible contributions more tax effective, as the Medicare Levy does not apply to these amounts
- delaying the withdrawal of any taxable component as a superannuation lump sum benefit until after age 60, as the Medicare Levy does not apply to these amounts
Reforms to work-related self-education expenses
The Government will limit work-related self-education expense deductions through an annual $2,000 cap on these expenses from 1 July 2014. 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
This measure is estimated to provide savings to the Budget of $514.3 million over the forward estimates period. Savings from this measure will be redirected to the Better Schools — A National Plan for School Improvement package.
Net medical expenses tax offset (NMETO) phase out from 1 July 2013
The Government will phase out the net medical expenses tax offset (NMETO), with transitional arrangements for those currently claiming the offset. However, the offset will continue to be available for taxpayers for out-of-pocket medical expenses relating to disability aids, attendant care or aged care until 1 July 2019.
From 1 July 2013 those taxpayers who claimed the NMETO for the 2012‑13 income year will continue to be eligible for the NMETO for the 2013‑14 income year if they have eligible out of pocket medical expenses above the relevant thresholds. Similarly, those who claim the NMETO in 2013‑14 will continue to be eligible for the NMETO in 2014‑15.
Clients who are considering elective medical procedures that qualify as eligible out-of-pocket medical expenses i.e. major dental procedures may wish to bring forward the procedure and incur the expense in the 2012-13 financial year. This way they may be able to remain eligible for the NMETA for future years under the transitional arrangements.
Preventing ‘dividend washing’
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. This measure will ensure that when an investor engages in ‘dividend washing’ by selling shares with a dividend and then immediately buying equivalent shares that still carry a right to a dividend, they will only be entitled to use one set of franking credits. The changes will be targeted to the two-day period after a share goes ex-dividend.
This measure is estimated to have a gain to revenue of $60.0 million over the forward estimates period.
Changes to the tax free status for earnings on superannuation assets supporting pension payments
From 1 July 2014, earnings on assets supporting income streams above $100,000 per year will be taxed at a rate of 15 per cent. This is in contrast to the current rules where all earnings from assets supporting superannuation income streams are tax-free. 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.
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 notional earnings for each year a defined benefit member is in receipt of a concessionally taxed superannuation pension.
The measure grandfathers the CGT treatment of existing assets supporting income streams until 1 July 2014. This will cause the 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.
The measure is expected to save the Government $313 million over the next four year forward estimate period. In built in this saving is an expected cost of $43 million to administer the increased earnings tax.
Comment: this measure is a compromise between the current generous tax-free concession for exempt pension income and the previously suggested harsh measures to cut wealthier Australians’ superannuation tax concessions. This could become a very complex measure to implement and administer and we will be closely examining the legislation when it is released specifically around the defined benefit elements and other superannuation interests.
In the long term, the CGT grandfathering rules and the tax increase may result in business real property being held more advantageously outside of superannuation when realised using the CGT small business concessions – especially for properties valued up to $2 million or those held for 15 years.
Increasing the concessional caps for certain superannuation members
The concessional contribution cap will be increased so that:
- From 1 July 2013 taxpayers aged 60 and over will have a $35,000 cap; and
- From 1 July 2014 taxpayers aged 50 and over will have a $35,000 cap.
This will replace the Government’s previous proposal of a higher cap for over 50s with balances under $500,000. The Government abandoned this proposal due to industry criticism that the proposed measure was too complex and difficult to administer.
The general concessional cap is expected to reach $35,000 by 1 July 2018.
This increase in the concessional contribution cap is expected to cost the Government $1.2 billion over the 4-year forward estimate period.
Reform of the Excess Contribution Tax treatment of excess concessional contributions.
The new Excess Contribution Tax (ECT) regime for concessional contributions will allow taxpayers that have exceeded their concessional contribution cap after 1 July 2013 to withdraw the excess contribution from their superannuation fund with the excess contribution being taxed at the taxpayer’s marginal rate. In addition, an interest charge will be levied on the excess contribution to recognise that tax on excess concessional contributions is collected at a later date than normal income tax.
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.
This measure will cost the Government $60 million over the next four years.
Reduction of higher tax concessions for contributions of high income earners
The Government has made minor amendments to the 2012-13 Budget measure which reduces the tax concession for concessional contributions for those earning over $300,000 by exempting certain contributions for federal judges and state higher level office holders, using a similar definition of income as used for Medicare levy surcharge purposes and refunding former temporary residents tax paid under the measure.
Extending normal deeming rules to superannuation account based income streams
The Government has proposed to extend the normal deeming rules to superannuation account-based income streams for the purposes of the pension income test. The Government said this was to ensure all financial investments are assessed fairly and under the same rules.
From 1 January 2015 the standard pension deeming arrangements will apply to new superannuation account-based income streams assessed under the pension income test rules.
All products held by pensioners before 1 January 2015 will be grandfathered indefinitely and continue to be assessed under the existing rules for the life of the product so no current pensioner will be affected, unless they choose to change products.
Extending concessional tax treatment to deferred lifetime annuities
The Government will provide the same concessional tax treatment that superannuation assets supporting superannuation income streams receive for deferred lifetime annuities. This will apply from 1 July 2014.
Changes to the arrangements for lost superannuation
The Government will further increase the account balance threshold for lost superannuation to be held by the Australian Taxation Office to $2,500 from 31 December 2015, and to $3,000 from 31 December 2016.
Social Security and Family Assistance Changes
Supporting seniors who downsize their home
The Government is investing $112.4 million over four years in a trial program that supports Age Pensioners and other pensioners over pension age who want to downsize their home without it immediately affecting their pension.
Eligible pensioners who have lived in their home for at least 25 years and want to downsize will need to put a minimum of 80% of excess sale proceeds from the sale of their former home into a special account, up to a maximum of $200,000. The funds in the special account will not be counted under the pension income and asset test for up to ten years or until a withdrawal is made from the account.
Baby Bonus to go
The Baby Bonus will remain in place until 28 February 2014, nine-and-a-half months from now. This will mean that until then, those with incomes of up to $150,000 a year will receive $5000 on the birth of their first child and $3000 for each subsequent baby.
After 1 March 2014, the qualifying threshold will drop significantly. Couples earning over $101,000 will not be eligible for a bonus for their first baby. The threshold for a second baby will be about $112,000. For those eligible, the Baby Bonus will be reduced to $2000 for the birth or adoption of a first child or each child in multiple births and $1000 for second or subsequent children. This will be paid through an initial payment of $500 with the remainder paid in seven fortnightly instalments.
Family Tax Benefit Changes
The Government has announced a number of changes to the eligibility and payment rules for Family Tax Benefit (FTB) Part A as well as other family payments. These are summarised as follows:
- From 1 January 2014, eligibility for FTB Part A for children aged 16 years and over will change so that FTB part A will only be paid until the end of the calendar year a child completes school
- The indexation of the upper income test limit of $150,000 for FTB Part B, the dependency tax offsets, the Paid Parental Leave Scheme and Dad and Partner Pay will be paused until 1 July 2017. The upper income free area for FTB Part A and FTB supplements will also remain at current levels until 1 July 2017.
- From 1 March 2014, FTB Part A will increase by $2,000 in the year following the birth or adoption of a first child or each child in multiple births, and $1,000 for the second or subsequent children.
- The allowed period of temporary absence from Australian while remaining eligible for FTB Part A will reduce from three years to one year from 1 July 2014. This change also applies to the Schoolkids Bonus and Paid Parental leave.
The Government will not go ahead with the planned increase to Family Tax Benefit Part A as announced in last year’s Federal Budget. The pledged increases were to take effect from 1 July 2013, where the maximum rate of Family Tax Benefit Part A was going to be increased by $300 per year for families with one child, and $600 per year for families with two or more children.
Child Care Benefit and Rebate measures from 1 July 2012
The Government will continue to pause the indexation of the annual cap on the Child Care Rebate for a further three years. The maximum amount of rebate that can be paid will remain at $7,500 a year until 30 June 2017. The percentage of out-of-pocket expenses that will be reimbursed remains at 50%.
In addition, from the 2012-13 year, families will have twelve months rather than the current two years from the end of the relevant financial year for which the family is claiming the Child Care Rebate and Benefit to reconcile their income, initiate lump sum claims and satisfy any requirements for end of year supplements. Most families will have the information they need for income reconciliations within this timeframe from their tax returns. Extensions to this time limit will be provided in exceptional circumstances, similar to arrangements for tax return lodgement.
The pause in indexation of the Child Care Rebate was originally announced in the 2010 Federal Budget with effect for four years. This announcement means that the maximum rebate amount will be frozen at 2008-09 levels for seven years.