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Superannuation | Tax | Small Business | Social Security

Federal Treasurer Wayne Swan delivered his fourth and the Gillard Government’s first Federal Budget on Tuesday, 10 May 2011.

The Treasurer had promised a ‘tough’ budget as the Government’s first step on the way to returning to surplus by 30 June 2013, but reactions from commentators have been mixed about how tough it really was.

As expected, the Budget contained a number of measures previously reported in the Government’s responses to the Henry Tax Review, the Cooper Review of superannuation and the Ripoll Inquiry into the financial advice industry.

Please note the proposed Budget does not become legislation until endorsed by the Senate.

Your situation

It’s always a good idea to speak to a financial adviser if you have any concerns about the effect of changes on your financial situation. Your adviser will have a deep understanding of the implications of the Budget and all the other reforms underway, including the timing of certain changes. They may also see an opportunity not previously available to you.

Budget highlights

There are a number of issues in this Budget we believe are important to investors and are the things you’re most likely to want to discuss or clarify with your adviser. These include:

Superannuation:

• Concessional contribution limits and what happens if you exceed them
• Confirming concessional contribution limits for people over 50
• Freeze on Government co-contribution limits

Pensions:

• A 25% discount on minimum pension payments from 1 July 2011 and back to normal from 1 July 2012 
• Work bonus for pensioners to be expanded from 1 July 2011

Taxation:

• A 50% tax discount on up to $1,000 of interest earned from 1 July 2011
• Low income tax offset no longer applies to unearned income of children under 18
• 70% of the low income tax offset to be received during the year not at the end

More details about these issues and how they might affect you can be found in this update.

Superannuation

Many of the superannuation measures announced in the Budget continue to support the growth in Australians’ super savings, with changes also responding to agreed recommendations from the Cooper Review of the superannuation system released last year.

Growing contributions

As announced in last year’s Budget, the Government intends to legislate to enable people to increase their super contributions through:

• progressively increasing the compulsory employer Super Guarantee Contribution rate from 9% to 12% by 2019
• extending SGC to older workers (up to age 75)
• providing a super contributions tax offset to low income earners of $500pa for workers earning up to $37,000.

Contribution concessions

Currently if your super contributions exceed your concessional contribution limit, those contributions are taxed at 31.5% in addition to the 15% tax applicable to all super contributions.

Since the cap was introduced, many people have been caught exceeding the limit by the Australian Taxation Office, the agency responsible for enforcing the law. A significant number of those people were simply unaware of the level of their accumulated contributions.

As a concession to this kind of oversight, the Government has introduced a change effective from 1 July 2011. If you exceed your concessional contribution limit by up to $10,000 you will be able to ask to have those contributions refunded and have the amount taxed at your marginal tax rate instead.

This refund option will only be available to people who breach their concessional contribution limit for the first time. The $10,000 threshold will not be indexed and is available for breaches in respect of contributions made in the 2011-12 financial year or later years.

What does this mean for you?

This will be particularly beneficial if you accidentally exceed the concessional contribution limit by a small amount. This generally happens if you have more than one employer or change jobs and don’t keep track of the employer contributions being made on your behalf.

Talk to your adviser about your current concessional contribution level before the end of this financial year and also plan ahead for 2011/12 and beyond. You should also discuss the tax implications should you qualify for a refund of excess contributions as this will need to be included as income for the year the contributions were made.

Contribution caps for over 50s

Currently there is a transitional concessional contributions cap of $50,000, for those aged 50 or over, which ends on 30 June 2012.

The Government has reconfirmed their intention to replace this from 1 July 2012, with a concessional contributions cap of $50,000, provided the individual is aged 50 or over and has less than $500,000 in superannuation. Unlike the current transitional cap which is fixed at $50,000, the new cap will increase over time remaining $25,000 higher than the standard concessional contributions cap for those under 50 years of age.

What does this mean for you?

The Government hasn’t released details about how the super balance figure of $500,000 will be determined, but if you’re over 50 you should talk to your adviser about taking advantage of the higher caps before 1 July 2012.

NOTE: No changes were announced that will affect Transition to Retirement strategies, but careful monitoring of super contribution levels is still important for those eligible for TTR. 

Minimum pension payments

For the past three financial years, the Government has reduced the minimum pension drawdown amount for account-based, allocated and market linked (term allocated) pensions. This was a measure introduced to lessen the impact of the global financial crisis in 2008/09.

From 1 July 2011, a reduction of 25% will apply to the normal minimum payment amounts and from 1 July 2012 minimum pension payment amounts will return to normal.

People can choose to receive less income from their account-based, allocated and market linked pensions. For example, if you are aged 65 or younger you’d normally have to receive income of at least 4% of your account balance, but for the 2011/12 financial year you only have to receive 3%.

This measure allows people to recoup capital losses incurred as a result of the global financial crisis.

What does this mean for you?

The increase in minimum pension minimums from 1 July 2012 may have the following affect on you, depending upon your age and circumstances:

• Age pensioners – if you are income tested, your Government pension entitlements may decrease
• Aged under 60 – may result in higher taxable income and thus greater tax (and flood levy)
• If you’ve implemented a ‘transition to retirement’ strategy – you may need to review your salary sacrifice arrangements to optimise cash flow and tax position.

Talk to your adviser about the possible impact of this change on your situation.

Co-contributions

The thresholds for Government super co-contribution eligibility will remain frozen for another year to 30 June 2013. This keeps the thresholds at $31,920 to be eligible for up to the full $1,000 co-contribution with eligibility ceasing at $61,920.

Tax  

Tax break on interest savings

As reported in last year’s Budget, from 1 July 2011 you’ll receive a 50% tax discount on up to $1,000 of interest income earned, including interest earned on deposits held in authorised deposit-taking institutions, bonds, debentures and annuity products.

The discount will be available for interest income earned directly as well as indirectly, such as via a managed fund (unit trust).

If you claim the discount for interest income you’ll have a reduced adjusted taxable income for the purpose of determining your eligibility for Government payments (e.g. family tax benefits) and other concessions.

Low income earners tax offset

From 1 July 2011, the low end PAYG tax scales will be reduced to allow 70% of the low income tax offset to be received throughout the year. This does not increase the value of the low income tax offset. It still remains at $1,500 for people with taxable income up to $30,000 and cuts out at $67,501.

For people on low incomes, it may mean a slight increase in disposable income up to $5.77 each week but less of a refund will be then provided when their tax return is lodged.

Also with effect from 1 July 2011, the low income tax offset will no longer apply to unearned income of children under age 18. Children under age 18 will still be entitled to the low income tax offset for any earned income, i.e. salary or wages.

Dependent spouse tax offset

The dependent spouse tax offset will be phased out for dependent spouses aged 40 or less. From 1 July 2011, taxpayers with a dependent spouse under age 40 will generally not be eligible for the dependent spouse tax offset.

However, taxpayers with an invalid or permanently disabled spouse, supporting a carer, or people who are eligible for the zone, overseas forces and overseas civilian tax offsets will not be affected by this change.

Special disability trusts 

The Government will introduce legislation to make special disability trusts more beneficial for families. This will include capital gains tax exemptions for assets transferred into an SDT for no consideration and for the recipient of the principal beneficiary’s main residence, if disposed of within two years of that beneficiary’s death.

Deceased estates

The Commissioner of Taxation will have discretion to extend the two-year ownership period in which the trustee of a deceased estate or beneficiary of an estate must sell the deceased's former home to access a full capital gains tax main residence exemption.

Income tax rates

No changes to income tax rates have been proposed in the budget, however taxpayers whose taxable income exceeds $50,000 in the 2011/2012 financial year will be required to contribute to the one-off Temporary Flood and Cyclone Relief Levy. Levies vary with taxable incomes. 

Company tax rates

The Government is reducing the company tax rate from 30% to 29% from 1 July 2013 and to 28% from 1 July 2014.  Small businesses will get the reduction to 28% from 1 July 2012. 

Small Business

Depreciation deductions

Small businesses will receive an instant tax deduction for the first $5,000 of any motor vehicle purchased from 1 July 2012. This measure is aimed at helping small businesses to improve cash flow.

The Government will cancel the existing Entrepreneurs Tax Offset (ETO) from 1 July 2012.

Other measures proposed from 1 July 2012 include an immediate deduction for all assets valued at under $5,000 (increased from $1,000) and a deduction for all other assets (except buildings) in a single depreciation pool at a rate of 30%.

Social Security changes

Work bonus

The work bonus was introduced in September 2009 to encourage pensioners to continue in part-time work to supplement their income. The Budget will expand on the bonus as follows:

What does this mean for you?

This change effectively allows a pensioner earn up to $6,500 pa from employment income without it affecting their pension. The credits can be carried forward across financial years and can only be used to offset employment income.

NOTE: No changes were announced in the Budget in relation to Age Pension payments.

Disability reforms

Many Social Security reforms are focused on workforce participation – particularly for people on Disability Support Pension. Measures included in the Budget aim to encourage and assist people with disabilities to return to work where possible.

Starting from 1 July 2012, the measures include:

• Participation interviews – recipients of the Disability Support Pension (DSP) who are under age 35 and have the capacity to work at least eight hours a week will be required to attend regular participation interviews so that Centrelink can develop plans to help them improve their chance of finding and obtaining employment.
• Increased work hours – a person who receives the DSP can currently only work up to 15 hours a week before losing the pension. This will be extended to 30 hours a week for people granted the DSP after 10 May 2005 and will allow people to test their ability to work without losing eligibility. They will still be subject to normal income and assets testing during this period to determine the amount of payment.
• Employer incentives – subsidies will be paid to employers who employ someone with a disability who has received Centrelink income support for at least two years. For details refer to www.skills.gov.au