Summary of the 2010 federal budget items relevant to financial servicesDolfinwise Financial Planning

14 May 2010

On Tuesday 11 May the 2010/11 Federal Budget was handed down. The centrepiece of the Budget was its earlier than forecast return to a surplus by 2012-13, three years sooner than previously predicted.

The Budget confirmed the Government’s commitment to the following proposals announced as part of the Government’s Stronger, Fairer, Simpler, a tax plan for our future (response the Henry Tax Review):

	increase of the Superannuation Guarantee (SG) rate from 9% to 12%, commencing 1 July 2013;
	raising the compulsory Superannuation Guarantee eligibility age from 70 to 75;
	introducing a 15% ‘super subsidy’ for low income earners capped at $500, effectively refunding contributions tax on up to $3,330 of concessional contributions.
	retaining the $50,000 concessional cap from 1 July 2012 for those aged 50 or over who have super balances of less than $500,000.
	reducing the small business company tax rate to 28% from 1 July 2012.
	allowing small businesses to immediately write off assets valued at under $5,000 and other assets in a single 30% rate depreciation pool.

A summary of the Budget measures announced by the Treasurer include:

Superannuation

Amendments to the co-contribution scheme announced in Budget 2009 have been made permanent

The Government has announced that they will permanently retain the matching rate for the superannuation co-contribution at 100% and the maximum contribution that is payable on an individual’s eligible personal non-concessional superannuation contributions at $1,000.

In addition, the Government has also announced that income thresholds will remain at $31,920 and $61,920 for the next two financial years.

ATO discretion on excess contribution tax assessments

This measure proposes giving the Commissioner the ability to exercise its discretion prior to an assessment being issued for excess contributions tax.

Currently, a taxpayer may apply to the Commissioner for a determination that part or all of their excess contributions be disregarded or reallocated to another income year. Such an application must be made within 60 days of receiving an excess contributions tax assessment, which also includes the taxpayer’s excess contributions tax liability.

This measure would allow an application to be made prior to receiving the assessment, potentially allowing a person to have a decision made before having to pay excess contributions tax.

Deduction for terminal illness benefits

Complying superannuation funds are able to claim tax deductions for the amount paid as a death or total and permanent disability benefit. These deductions can only be claimed if the trustee elects not to claim a tax deduction for the insurance premiums in the current and future financial years. This is available to all superannuation funds but is usually only claimed by self-managed superannuation funds.
The legislation is proposed to be extended so that the deduction can also be claimed if benefits are paid due to a terminal medical illness and can be backdated to 16 February 2008, the date the terminal medical illness condition of release was introduced in to the superannuation legislation.

Taxation

50% tax discount on interest income

The Government has announced that from the 1st of July 2011 taxpayers will be eligible for a 50 per cent discount on the first $1,000 of income earned per annum earned on deposits, bonds, debentures and annuity products. The discount is expected to benefit around 5.7 million taxpayers in 2011-12.

Changes to marginal tax rates

The final raft of changes to the tax thresholds and rates will take effect from 1 July 2010. These include increasing the $35,000 threshold to $37,000 and decreasing the 38% tax to 37%

*Please note: excludes Medicare Levy
The low income tax offset will be increased to $1,500 from 1 July 2010, up from $1,350. This will provide a tax-free threshold of $16,000 for those on incomes of $30,000 or less

The Medicare Levy low-income threshold will increase to $18,488 (up from $17,794) for singles, and to $31,196 (up from $30,025) for couples.

Lodgement of Tax return
The Government has announced that from the 2012/13 financial year taxpayers will be provided with the choice of a $500 standard deduction to replace deductions for their work-related expenses and the cost of managing tax affairs. This amount will increase to $1,000 from the 2013/14 financial year.
It should be noted that taxpayers with expenses above the standard deduction will be able to continue to claim those expenses under the existing rules when lodging their tax return.

Increase to medical rebate threshold
The Government has announced that from 1 July 2010 that the Medical rebate threshold will increase from $1,500 to $2,000. It is only medical expenses above this amount that are eligible for the 20% tax offset.

Australia as a regional financial services centre
The Government have announced that they will begin consultation on measures to reform and expand Australia’s managed funds industry by removing impediments to international investment. To this end they have today released a Consultation paper.

The reforms will give consideration to the recommendations made by the Johnson Report, which recommended that the Government introduce an Investment Management Regime (IMR) of wide application; and the Board of Taxation review the scope for providing a broader range of tax flow through collective investment vehicles.

The Government has also announced that they will progressively reduce the interest withholding tax (IWT) rate incurred by financial institutions on most interest paid on offshore borrowings.
This measure will phase down the IWT rate applying to foreign bank branches from the current 5 per cent to 2.5 per cent in 2013/14 and to zero from 2014/15. The IWT rate for other financial institutions will be reduced from 10 per cent to 7.5 per cent in 2013/14 and to 5 per cent from 2014/15, with a target rate of zero.
It should be noted that the IWT phase down will not apply to interest paid on non-residential retail deposits held in Australia and as such will remain at 10%.

First Home Saver Accounts (FHSA)
The Government proposes that savings in an FHSA can be paid into an approved mortgage after the end of a minimum qualifying period, rather than requiring it to be paid to a superannuation account. The current rules require that FHSA holders keep their savings in an FHSA for 4 financial years before they are able to use those savings to buy a home. At present if an account holder buys a home before the end of that 4-year period, the balance of their FHSA must be transferred to their superannuation.
The changes will apply for houses purchased after assent of the legislation that will give effect to this measure.

Increase to the benchmark interest rate for capital protected borrowings
The Government has announced that it will increase the benchmark interest rate that applies to capital protected borrowings by 100 basis points. The proposed indicator rate is now the standard variable housing loan plus 100 basis points instead of just the indicator rate for standard housing loans.
This measure will apply to capital protected borrowings entered into from budget night 2008 onwards.

Clarification of tax treatment of instalment warrants
The Government had previously announced legislation would be introduced to ensure CGT is not payable under an instalment warrant arrangement when the second instalment was made. CGT would only be payable when the asset is sold.

Under a instalment warrant arrangement the asset is held in trust until the second instalment is made to repay the loan in full. Legal title is then transferred to the investor. It has been an industry concern that incorrectly established instalment warrant arrangements may give rise to CGT on payment of the second instalment.

The Government has proposed amendments to legislation to treat the investor as the beneficial owner of the asset from initial purchase so that CGT is not triggered upon transfer of legal title. This is also applies to superannuation funds.

Non-commercial loan rules
In Budget 2009, rules were changed so that non-commercial loan rules from a private company to a shareholder or associate may be taxed as a dividend from 1 July 2009. This has been amended to clarify that where a private company provides a home to a shareholder or their associate, this is not deemed to be a dividend.

Cap to the Child Care Rebate (CCR)
The Government has announced that there will be no further indexation of the current annual cap of $7,778 per child for the next four years from 1 July 2010. It should be noted that this will not reduce the percentage of out-of-pocket expenses reimbursed by the government, which will remain at 50 per cent (up to the annual cap).

Social Security & Aged Care

Reforms to special disability trusts
The Government has announced that changes will be made to Special Disability Trusts which will increase flexibility for family members and carers who have the financial means to provide private financial provision for the future care and accommodation needs of a family member with a severe disability.

It is proposed that from 1 January 2011 that the following changes will apply:

	people with disability will be able to work up to seven hours a week and still qualify as a beneficiary of a Trust;
	the Trust will be able to pay for the beneficiary's medical expenses including membership costs for private health funds and the maintenance expenses of assets and properties;
	the Trust will be able to spend up to $10,000 in a financial year on discretionary items not related to care and accommodation needs of the beneficiary to support social and community participation of the beneficiary; and
	in two years, the Government will undertake a review of the amount that can be held in the trust on a concessional basis, the amount that can be gifted, and who can request audits.

Changes to encourage the non-working with a disability to return to work
The Government has announced that from 1 July 2010 recipients of the disability support pension (DSP) will be required to provide sufficient evidence that they are unable to work independently, even with assistance and support.

To satisfy this requirement, most applicants will have to provide evidence that they have been unable to obtain employment through an open employment service or vocational rehabilitation. This contrasts to the current situation where people can apply for DSP without having to demonstrate that they have investigated alternative employment options.

War widows(ers) in de-facto relationships
War widows(ers) who remarry cannot continue to claim the war widow(er) pension. However, an anomaly has existed to allow those entering into a de-facto relationship to claim the pension. This anomaly will be corrected so that:

	War widows(ers) who remarry or enter a de-facto relationship before claiming the pension will not qualify; and
	War widows(ers) who remarry or enter a de-facto relationship after claiming the pension will continue to receive the pension.

Jason Bragger CFP DipFP BSC BA
Director - Dolfinwise

(07) 3831 5990