Federal Budget 2012
On Tuesday night, the Federal Government handed down its Budget for 2012/13.
One of the major surprise was the Government’s decision to defer the (re)introduction of a higher concessional contribution threshold for people aged 50 or over to 1 July 2014. Previous announcements had indicated a 1 July 2012 start date. This will necessitate all clients reviewing their Salary Sacrifice arrangements prior to 30 June 2012. Please contact us for assistance in this matter.
The Government also announced that it would no longer proceed with a range of previously announced (but not legislated) proposals including:
- The reduction in the corporate tax rate
- The 50% tax discount for interest income, and
- The standard deduction to be allowed when individuals claim work related expenses in their tax return.
Budget measures and announcements relevant to financial planning clients:
There were a lot of changes in the budget and we have broken them down into 3 sections: Taxation, Superannuation and Centrelink. We look forward to assisting each of our clients interpret how these change affect individual circumstances over the next few months. Note this document is a summary only and action should not be taken based on the information provided alone and without seeking advice.
Personal income tax changes
The changes to personal income tax were not a 2012 budget measure but were initially announced with the introduction of the Carbon Pricing scheme in July 2011 and have
since been legislated.
Taking effect from 1 July 2012 the changes for Australian residents are as follows.
|Current (2011/12)||From 1 July 2012|
|Taxable income||Marginal tax rate||Taxable income||Marginal tax rate|
|$0 – $6,000||0%||$0 – $18,200||0%|
|$6,001 – $37,000||15%||$18,201 – $37,000||19%|
|$37,001 – $80,000||30%||$37,001 – $80,000||32.5%|
|$80,001 – $180,000||37%||$80,001 – $180,000||37%|
|$180,001 and above||45%||$180,001 and above||45%|
- Taxpayers with incomes of up to $80,000 will only get a tax cut. Tax payers with incomes over $80,000 will receive no benefit.
- The tax-free threshold will initially increase from $6,000 to $18,200 and, according to the Government, will free up to one million low-income earners from needing to lodge a tax return from 2012/13.
- The tax–free threshold will further rise to $19,400 in 2015–2016.
- The Low Income Tax offset (LITO) will initially be reduced from $1,500 to $445.
- The combined effect of the higher statutory tax-free threshold and the LITO is that the effective tax-free threshold will initially rise to $20,542. This means individuals will be able to earn up to $20,542 from 2012/13 without paying any net income tax.
Non- Resident Taxpayers
From 8 May 2012 (Budget night)
Non-residents will no longer be able to access the standard 50% discount on assessable capital gains. If you are an Australian tax resident living or moving overseas and may lose your tax residency status, it is important that you obtain advice on the CGT implications that may arise for you in the future.
From 1 July 2012
Non-residents will pay tax at the rate of 32.5% on their taxable income up to $80,000 and thereafter at the same rates that apply to resident taxpayers.
From 1 July 2015, the 32.5% will increase to 33% in line with that applicable to resident taxpayers.
Dolfinwise Strategy: Overseas residents with CGT liable assets in Australia should contact us for advice and should consider getting a valuation on 8th May 2012 for their asset
Increasing Medicare levy low income threshold
Proposed start date: 1 July 2011
The Government will increase the Medicare levy low income thresholds to $19,404 (up from $18,839) for individuals and $32,743 (up from $31,789) for families, with effect from 1 July 2011. The additional amount for each dependent child or student will also increase to $3,007 (up from $2,919).
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The Medicare levy threshold for single pensioners below Age Pension age will also be increased to $30,451, with effect from 1 July 2011.
Removal or reduction in Private Health Insurance rebate
Effective from 1 July 2012 (already legislated)
The government has introduced changes to the private health insurance rebate and the Medicare levy surcharge. From 1 July 2012, the existing Private Health Insurance rebate will be scaled back as follows:
- A scale back of 10% for those earning between $84,000 and $97,000 (singles) and between $168,000 and $194,000 (couples).
- A scale back of 20% will apply to incomes between $97,000 and $130,000 (singles) and $194,000 and $260,000 (couples).
- No rebate for those earning over $130,000 for singles and $260,000 for couples.
Furthermore, there will be an increase in the Medicare Levy surcharge for those who decide to opt out of private health insurance due to the ever increasing cost of private health cover.
As an example, if a tax payer earns more than $130,000 per annum, they will lose the current 30% private health insurance rebate. For every $1,000 of premium, this is an extra $300 that they will now have to pay. However, if they choose not to have the private health cover, at $130,000 of taxable income, the Medicare Levy Surcharge would equate to $1,950 (1.5%).
Dolfinwise Strategy consideration: Most private health funds are offering the ability to pre-pay premiums for a 12 month period. If you take advantage of this and prepay your 2012/13 premium before 1 July 2012, you will still receive the full rebate as it is based on the time of payment. This strategy could be considered by those singles earning more than $84,000 and couples earning more than $168,000 combined. Please contact us for advice if considering.
Changes to the taxation of employment termination payments
Effective from 1 July 2012
The employment termination payment (ETP) tax offset ensures that the taxable component of an ETP up to the ETP cap amount ($175,000 in 2012/13) is taxed at a concessional rate (a maximum tax rate of 15% for those over preservation age and 30% for those under preservation age). The amount in excess of the ETP cap amount is taxed at the top marginal rate.
This tax treatment is to continue for certain ETPs relating to genuine redundancy (including to those aged 65 and over), invalidity, compensation due to an employment-related dispute, and death.
However, where the ETP is not paid due to these circumstances, for example where it is a golden handshake payment, the tax offset will from 1 July 2012 be potentially reduced.
Only that part of the ETP cap amount that takes a person’s total annual taxable income (including the ETP) to no more than $180,000 will receive the ETP tax offset and concessional tax treatment. Amounts above this $180,000 total income cap will be taxed at marginal rates with no offset
Dolfinwise Strategy: If you have an expected Golden Handshake arrangement pending try to negotiate it to occur prior to 1st July 2012
Net Medical Expense Tax Offset
Effective from 1 July 2012
The Government has announced it will introduce a means test for the net medical expenses tax offset (NMETO) whereby those with adjusted taxable income above the Medicare levy surcharge thresholds will only be able to claim medical expenses over a threshold of $5,000 instead of the current $2,060. Furthermore, the offset they may claim will be 10% of the expenses above the threshold instead of the current 20%.
The Medicare levy surcharge thresholds for 2012/13 are $84,000 for singles and $168,000 for couples or families.
Phase out of mature age worker tax offset
Effective from 1 July 2012
The Government will phase out the mature age worker tax offset from 1 July 2012 for taxpayers born on or after 1 July 1957. Access to the offset will be maintained for taxpayers who are aged 55 years or older in 2011/12.
Deferral of higher concessional contributions tax
Deferred by two years to 1 July 2014
The Government will defer the start date of the higher concessional contributions cap for over 50s from 1 July 2012 to 1 July 2014. Under this measure, individuals aged 50 and over with superannuation balances below $500,000 will be able to make up to $25,000 more in concessional contributions than allowed under the standard $25,000 concessional contributions cap.
The two-year deferral means that all individuals, regardless of age, will be subject to the $25,000 concessional cap for the 2012/13 and 2013/14 financial years.
Dolfinwise Tip: All salary sacrifice arrangements should be reviewed prior to 30 June 2012 especially for those aged over 50. The new $25,000 limits include all deductible contributions including SG contributions from employers. Investors should discuss what this means for TTR strategies and savings plans and alternative options need considering for investment such as investment bonds, non-concessional contributions to Super and debt reduction strategies. Clients should seek advice around these options based on their own individual circumstances.
It is expected that from 1 July 2014 the $25,000 cap will likely have increased to $30,000 through indexation. Accordingly, the higher concessional contributions cap for over 50s with superannuation balances below $500,000 would then commence at $55,000.
Higher tax on concessional contributions for high income earners
Effective 1 July 2012
A higher level of “contributions tax” on concessional contributions will apply to you if your “total income” exceeds of $300,000. The higher tax rate will be 30%, double the standard 15% tax rate.
It’s important to remember that a 30% tax rate on these contributions is still better than the 46.5% personal tax (including Medicare) that would otherwise be payable on this amount if not contributed to super.
The definition of ‘income’ for this measure will include taxable income, concessional superannuation contributions, adjusted fringe benefits, total net investment loss, target foreign income, tax-free government pensions and benefits, less any child support payments.
Dolfinwise tip: While this will be a reduction in the benefit of salary sacrifice clients should still consider taking advantage of the $25,000 cap as it is still better than paying a 46.5% marginal tax rate subject to cashflow considerations. Other mechanisms to keep income below $300,000per annum should be considered for those just over this income.
Other superannuation measures
Whilst not specifically discussed in the 2012 Budget, the Government has previously announced a number of other superannuation measures that will have an impact from 1 July 2012 (or later years). These include:
- The introduction of a low-income earner contribution from 1 July 2012 of up to $500 for those with incomes up to $37,000. This essentially represents a refund of tax on concessional contributions.
- The reduction in Government co-contribution from a maximum matching of $1,000 to $500 from 1 July 2012.
- The gradual increase in the superannuation guarantee (SG) charge rate from 9% to 12%, commencing from 1 July 2013.
- The removal of an age limit for SG contribution entitlements from 1 July 2013.
Replacing the Education Tax Refund with the Schoolkids Bonus
Effective from 1 January 2013
The Government will replace the Education Tax Refund (ETR) with a Schoolkids Bonus to be paid as two equal instalments in January and July each year. Families in receipt of Family Tax Benefit Part A (FTB A) will be paid:
- $410 p.a. for each primary school student, and
- $820 p.a. for each secondary school student
All eligible families will receive the full rate of payment. As a result, families are no longer required to retain receipts as proof of purchase or wait until they submit their tax return.
Changes to Family Tax Benefit Part A
Effective from 1 July 2013
The Government will increase the maximum payment of FTB A by:-
- $300 p.a. for families with 1 child, and
- $600 p.a. for families with 2 or more children
For families receiving the base rate of FTB A, the increase will be:-
- $100 p.a. for families with 1 child, and
- $200 p.a. for families with 2 or more children
For example, a family with two children under the age of 12 will receive a $600 boost, up to a family adjusted taxable income of around $78,000 p.a. or a $200 boost, with a family adjusted taxable income between around $78,000 p.a. and around $112,000 p.a.
Additionally, the Government will tighten the age requirement for FTB A from less than 21 years of age, to less than 18 years of age (or where a young person remains in secondary school, the end of the calendar year in which they turn 19). Individuals who no longer qualify for FTB A may be eligible to receive Youth Allowance subject to usual eligibility requirements.
Australian Working Life Residency
Effective from 1 January 2014
Currently, Age Pension recipients who are overseas for more than 26 weeks are only paid their maximum entitlement if their Australia Working Life Residence (AWLR) is 25 years or more. A recipients AWLR refers to periods from age 16 to Age Pension age when they were an Australia resident. (There is no requirement to work to accrue AWLR years).
The Government will amend these rules so that the maximum entitlement will only continue if their AWLR is 35 years or more. Pension recipients with less than 35 years AWLR will be paid a proportional rate.
Portability of certain Australian Government Payments
Effective from 1 January 2013
The Government is tightening the rules for people who travel overseas while receiving certain income support and family assistance payments.
Under the change, the amount of time individuals can travel overseas while continuing to receive their payment will be reduced from 13 weeks to 6 weeks. This does not apply to the Age Pension.
Parenting Payment – tightening of eligibility for grandfathered recipients
Effective from 1 January 2013
Currently, recipients of Parenting Payment (PP) who were granted the payment prior to 1 July 2006 do not lose eligibility until their youngest child attains age 16.
The Government will align PP eligibility for all recipients so that the payment will cease when the youngest child attains age 6 (for partnered recipients), or age 8 (for single recipients).
Liquid Asset Waiting Period
Effective from 1 July 2013
From 1 July 2013, the Government is proposing to increase the amount of assets that a claimant can have before they are affected by the LAWP. Under the proposal, a recipient will be affected by LAWP if their liquid assets equal:
- $5,500 or more for an individual who is not a member of a couple and does not have a dependent child
- $11,000 or more for an individual who is a member of a couple and/or has a dependent child.
The change will affect applicants for Newstart Allowance, Youth Allowance, Sickness Allowance and Austudy payments.
It is important to note that these proposals, despite largely having been announced previously, will require passage of legislation before they are implemented. The final version of the changes may differ to the announcements made in the Budget. As with all changes, it is important that you speak with your financial adviser to determine how these announcements will impact on your personal situation.
We will continue to analyse and follow the proposals highlighted below and will keep you abreast of developments.