The Government has proposed some relatively conservative changes to Australia’s superannuation and retirement system in this year’s Federal Budget.

Superannuation contribution caps

One of the more interesting developments is the indexation of contribution caps from 1 July 2014. Regular indexation of the caps was legislated seven years ago; however it had been frozen in recent years.

Excess non-concessional contributions

The Budget now allows individuals who inadvertently exceed the non-concessional contribution cap to withdraw the excess contributions together with any earnings on those contributions.

The refunded earnings will be taxed at the individual’s marginal rate of tax. Any withdrawal of the excess non-concessional contributions will not attract a penalty tax.

If an individual does not choose to exercise this choice, the excess non-concessional contributions will be subject to the excess non-concessional contribution tax at the top marginal rate.

It is yet to be determined if a timeline will exist for the individual to exercise their choice, or if a process will be used in determining how the contributions will be returned.

The Government has indicated that it will be consulting with industry to finalise these details.

Superannuation guarantee

The Government has announced that it will change the timetable for increasing the superannuation guarantee rate to 12 per cent as part of the proposed repeal of the Mineral Resource Rent Tax.

The rate will increase from 9.25 per cent to 9.5 per cent from 1 July 2014 as currently legislated.

The rate will then remain at 9.5 per cent until 30 June 2018, for a four year period, and then increase by 0.5 percentage points each year until it reaches 12 per cent.

Increase in age pension

The qualifying age for the pension will increase to 70 by the year 2035. This means that Australians born after 1956 will have to work until they are 70 before they are eligible for the age pension.

This increase has occurred in an attempt to ensure that the age pension remains sustainable and affordable, as well as being targeted to those in genuine need.

No existing recipient of the aged pension would have their access reduced, effectively excluding the baby boomers from the changes.

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Last night, the Treasurer, Mr Joe Hockey, delivered his first Budget describing it as “the Budget that gets on with the job and it is time, for all of us, to contribute and build”. The 2014/15 Budget sets a timeline for reducing the deficit from its present level of $49.9 billion to $29.8 billion next financial year, representing a faster path to surplus than previously signalled.

There were few surprises with the focus on tough saving measures with major changes to education, health and welfare and an unprecedented $80 billion cut to health and education spending over the next decade.

Key points include:

Temporary budget repair levy to be introduced

• Superannuation guarantee rise to 9.5 per cent as at 1 July 2014
• Refund of excess non-concessional contributions
• Various changes to family assistance including Family Tax Benefit Part B
• Various reforms to the pension system including increasing the age pension qualifying age to 70 years
• Changes to the Medicare system including a $7 co-payment for visiting the GP

As highlighted, there are a number of legislative changes that could have an impact on you and your family. We’ve summarised some of the key points but please note that these are subject to the passing of legislation, and should be discussed with Leenane Templeton Wealth Management.

Superannuation

Excess non-concessional contributions

The Government announced that, if you have made any non-concessional contributions that have exceeded the limit, you will be able to withdraw these from the fund to which you contributed. This change applies to contributions made since 1 July 2013, and replaces the previous situation which involved heavy penalties.

The current legislated non-concessional caps for 2014/15 are $180,000 per annum or $540,000 over three years. These have not been changed.

Superannuation guarantee rate

From 1 July 2014, the superannuation guarantee rate will increase to 9.5 per cent. It will stay at that rate until 1 July 2018 when it will increase by half a percentage point each year until it reaches 12 per cent in 2022 as outlined in the following table:

First home saver accounts

The first home saver accounts scheme will be abolished from 1 July 2014.

Taxation

Temporary budget repair levy

If you earn an income of $180,000 per annum or more, you will incur an additional two per cent levy on the amount earned over $180,000. For a period of three years only, commencing from 1 July 2014 and finishing on 30 June 2017, this will bring the top marginal tax rate to 47 per cent (plus the Medicare levy of two per cent).

Fringe benefits tax (FBT)

The FBT rate will increase from 47 per cent to 49 per cent from 1 April 2015 until 31 March 2017. This is to ensure that people earning over $180,000 don’t use salary packaging to avoid the additional impost associated with the temporary budget repair levy.

If you are currently packaging a car this may impact you.

Mature age workers tax offset

This will be abolished from 1 July 2014 rather than being phased out.

Dependent spouse tax offset

This will be abolished from 1 July 2014.

Centrelink and other Government benefits/payments

Increasing the age pension qualifying age

From 1 July 2025, the age pension qualifying age will start rising by six months every two years, from 67 years to 70 years by 1 July 2035.

In effect, someone born after 1 January 1966 will not be able to apply for the age pension until 70.

This does not mean you will need to work to age 70, just that you will need to rely on superannuation and other savings between retiring from the workforce and reaching age pension age.

Resetting the deeming rate thresholds

From September 2017, if you are a single pensioner, the Government will change the deeming rate thresholds by resetting them from $46,600 to $30,000 and from $77,400 to $50,000 if you are a pensioner couple. Current deeming rates mean that single income support recipients have certain financial assets of up to $46,600 deemed to earn income of 2 per cent and above $46,600 deemed to earn 3.5 per cent per annum. 

A lowering of the thresholds will ensure that more people are caught under the Centrelink income test. However, most Centrelink recipients are caught by the assets test and not the income test.

Indexation of pension and other payments

The indexation of pension and other equivalent payments will be linked to the consumer price index (CPI). This will apply from 1 July 2014 to Parenting Payment Single recipients and from 1 September 2017 to Bereavement Allowance and pension payments such as age pension, disability support pension, carer payment and veterans’ affairs pensions.

Disability Support Pension (DSP)

If you are a DSP recipient, the amount of time you can leave Australia and still receive the DSP will be reduced. The payment will be restricted to a maximum of four weeks in a 12 month period. The new rules apply from 1 January 2015, to existing and new applicants. This may significantly impact couples where one person is on the age pension and the other is on the DSP. Age pensioners are allowed to travel for up to 26 weeks in contrast to four weeks for DSP.

Commonwealth Seniors Health Card

From 1 July 2014, the current income levels for the Commonwealth Seniors Health Card (CSHC) will be indexed by the CPI. Currently, you may apply for the CSHC if you are single and earn less than $50,000 in adjusted taxable income per annum or a couple and earn less than $80,000 per annum.

New applicants will have the full amount of any account-based pension included in the assessment for determining eligibility for the card. Previously, these tax-free pensions were not included in the assessment.

Family payments

From 1 July 2015, the Government will reduce the Family Tax Benefit Part B (FTB Part B) primary earner income limit from $150,000 to $100,000 per annum.  While this will be limited to families whose youngest child is younger than six years of age, as a transitional arrangement, families with a youngest child aged six and over on 30 June 2015 will remain eligible for FTB Part B for two years.

Other

Health

From 1 July 2015, bulk billed visits to General Practitioners, blood tests and XRays will cost the ordinary tax payer $7 per visit. Those on income support and children under 16 will also have to make a co-payment but it will be limited to the first ten visits. The increase is to fund Disability Care.

Pharmaceutical benefits scheme

Co‑payments will increase for general patients by $5.00 (from $37.70 to $42.70) and for concessional patients by $0.80 (from $6.10 to $6.90) in 2015.

From 1 January 2015, PBS safety net thresholds will increase each year for four years. General safety net thresholds will increase by 10 per cent each year and concessional safety nets will increase by the cost of two prescriptions each year.

These increases are in addition to the existing annual indexation of co‑payments and safety net thresholds in line with the CPI.

Universities – HECS and HELP

From 1 June 2016, HECS and HELP assistance will remain available, however the interest rate will no longer be set at CPI but instead at the 10 year bond rate (albeit capped at six per cent). The minimum wage at which the debt will need to be repaid will also start earlier from 1 July 2016.

Whilst HECS debt holders will be disappointed at this change, the interest rate charged is still extremely low and it may still be worthwhile deferring repayment in favour of reducing other non-deductible debt.

Before making any decisions, you should talk to your Leenane Templeton or another financial planner about how these changes apply to you.

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Highlights

2013/14 Federal Budget highlights

The Federal Treasurer, Mr Wayne Swan, handed down his sixth budget at 7:30 pm (AEST) on 14 May 2013. The 2013/14 Federal Budget could be described as a moderate one in the context of the current budget deficit of $18b. It sets a pathway to return the budget to balance in 2015/16 and to surplus by 2016/17 but with continuing investment in the economy.

In terms of revenue measures, the budget largely aims to protect the corporate tax base from international profit-shifting and erosion, close loopholes and better target concessions. 
 
Here are the tax and superannuation highlights.

Individuals and families

Increase in the Medicare Levy
 
The Medicare Levy will increase from 1.5% to 2% from 1 July 2014 to provide funding for Disability Care Australia.
 
Date of effect 
These measures apply from 1 July 2014.
 
Source: Budget Paper No 2, p 28.
  
 

2012/13 Medicare levy low income thresholds 

The Medicare levy low income threshold for the 2012/13 income year will increase to $20,542 for individuals, and $32,279 for pensioners eligible for the Seniors and Pensioners Tax Offset. 
 
The Medicare levy low income threshold for families for the 2012/13 income year will increase to $33,693, and the additional family threshold amount for each dependent child or student will increase to $3,094. 
  
Date of effect 
These measures apply from 1 July 2012.
 
Source: Budget Paper No 2, p 29.
 

Replacing the Baby Bonus with new family payment arrangements
 
Family Tax Benefit Part A (FTB Part A) payments will be increased by $2,000, to be paid in the year following the birth or adoption of a first child or each child in multiple births, and $1,000 for second and subsequent children. The additional FTB Part A will be paid as an initial payment of $500, with the remainder to be paid in seven fortnightly instalments. 
 
Parents who take up Paid Parental Leave (PPL) will not be eligible for the additional FTB Part A component. However, the work test under the PPL scheme will be extended so that parents will be able to count periods of government PPL as "work", just like employer-funded PPL. 
 
As a result of these reforms, the Baby Bonus will be abolished.
 
This measure acts on a recommendation of the Australia's Future Tax System review (the Henry Review). 
 
Date of effect
This measure will apply from 1 March 2014.
 
Source: Budget Paper No 1, pp 1-18 and No 2, p 144; Minister for Families, Community Services and Indigenous Affairs' press release "A more sustainable family payments system", 14 May 2013.
 

Clean Energy Future: carbon price reduced and income tax cuts deferred

As part of the Clean Energy Future Package, the carbon price is projected to fall from $25.40 in 2014/15 to $12.10 in 2015/16. Accordingly, as previously announced, income tax cuts that had been already legislated (by way of increasing the tax-free threshold) and due to commence on 1 July 2015 will be deferred. 
 
Source: Budget Paper No 2, p 24; Treasurer's press release "Clean Energy Future Package Working in Australia's Interest", 8 May 2012.
 

Net medical expenses tax offset to be phased out

The net medical expenses tax offset (NME tax offset) will be phased out with transitional arrangements applying to those who currently claim the offset. 
 
From 1 July 2013, those taxpayers who claimed the NME tax offset in the 2012/13 income year will continue to be eligible for the offset in the 2013/14 income year if they have eligible out-of-pocket medical expenses above the relevant thresholds. Similarly, those who claim the NME tax offset in the 2013/14 income year will continue to be eligible for the offset in the 2014/15 income year. 
 
The NME tax offset will continue to be available for taxpayers for out-of-pocket medical expenses relating to disability aids, attendant care or aged care expenses until 1 July 2019 when DisabilityCare Australia becomes fully operational and aged care reforms have been in place for several years. 
 
Source: Budget Paper No 2, p 30.
 

Changes to Self-Education Expenses

Self-education expenses will be capped at $2,000 per annum.
 
However employers who pay self-education expenses on behalf of employees, which is not part of a salary sacrifice arrangement, are not effected.
 
Date of effect 
This measure will apply from 1 July 2014.
 
Source: Budget Paper No 2, p 30.
 

HECS-HELP discount and voluntary HELP repayment bonus: discounts to end

The following discounts relating to the Higher Education Loan Program will be removed: 
•    the 10% discount available to students electing to pay their student contribution up-front, and 
•    the 5% bonus on voluntary payments made to the Tax Office of $500 or more. 
 
 

Superannuation

Changes to Superannuation

The government confirmed the changes to superannuation that were announced on 5 April 2013. These changes are:
 
•    Changes to the tax exemption for earnings on superannuation assets supporting income streams
•    Reform of the Excess Contribution Tax treatment of excess concessional contributions.
•    Council of Superannuation Custodians
•    Extending normal deeming rules to superannuation account based income streams
•    Extending concessional tax treatment to deferred lifetime annuities
•    Changes to the arrangements for lost superannuation 
 

Low income superannuation contribution

The eligibility criteria for the low income superannuation contribution (LISC) will be amended to now pay individuals with an entitlement below $20. Previously, the LISC was not paid if it would be less than $20. Entitlements under $10 will be rounded up to $10. 

The LISC effectively refunds, up to $500 a year, the tax paid on superannuation concessional contributions for people with incomes up to $37,000. 
 
Source: Budget Paper No 2, p 266.
 

 
Additional funding for Superannuation Complaints Tribunal

Additional funding of $2.6m over four years will be provided to support the operations of the Superannuation Complaints Tribunal. The cost of this measure will be offset by an increase in the levy on Australian Prudential Regulation Authority regulated superannuation funds. 

Source: Budget Paper No 2, p 271.
 

  
Investing in Shares
 

Removing "dividend washing" opportunities

Measures will be introduced to ensure that sophisticated investors will not be able to engage in "dividend washing" allowing them to claim two sets of franking credits on effectively the same parcel of shares. 
 
An investor selling shares ex-dividend and then immediately buying equivalent shares which carry a right to a dividend (cum-dividend) will only be entitled to claim one set of franking credits. To achieve this, changes are proposed to the required holding period of 45 days to gain access to franking credits attached to dividends paid on a share. Changes to the "last-in first-out" rules will also be considered. 
 
The government will consult with business to ensure the best legislative response is implemented.
 
The measures will only apply to investors with franking credit tax offset entitlements of more than $5,000.
 
Date of effect 
The measure will apply to income years commencing on or after 1 July 2013.
 
Source: Budget Paper No 2, p 36; Treasurer and Assistant Treasurer's joint press release "Protecting the corporate tax base from erosion and loopholes"; Assistant Treasurer's press release "Protecting the corporate tax base from erosion and loopholes – Measures and consultation arrangements", 14 May 2013.
 

Small & Large Business

Extension of monthly PAYG instalments to other large entities

All large entities will be required to make monthly Pay As You Go (PAYG) income tax instalments, including trusts, superannuation funds, sole traders and large investors. The measure extends the previously announced proposal to apply the PAYG instalment system to large companies. 

In summary, the move to monthly PAYG instalments will apply as follows: 
•    companies with turnover of more than $1b will still move to monthly PAYG instalments from 1 January 2014 
•    companies with turnover of $100m or more will still move to monthly PAYG instalments from 1 January 2015 
•    companies with turnover of $20m or more, and all other entities in the PAYG instalment system with turnover of $1b or more, will move to monthly PAYG instalments from 1 January 2016, and 
•    all other entities in the PAYG instalment system with turnover of $20m or more will move to monthly PAYG instalments from 1 January 2017. 
 
Entities, other than head companies or provisional head companies, that have a turnover of less than $100m and report GST on a quarterly or annual basis, will not be required to pay PAYG instalments monthly. 
 
In addition, entities in the taxation of financial arrangements (TOFA) regime will assess their entry to monthly instalments using a modified turnover test based on their gross TOFA income, rather than their net TOFA income. 
 
Source: Budget Paper No 2, pp 26-27.
 

Tax Office trusts taskforce

The government will provide $67.9m over four years to the Tax Office to undertake compliance activity in relation to taxpayers who have been involved in egregious tax avoidance and evasion using trust structures. 

This measure is estimated to increase revenue by $379m over the forward estimates period.
 
The Tax Office will target the exploitation of trusts to: 
•    conceal income 
•    mischaracterise transactions 
•    artificially reduce trust income amounts, and 
•    underpay tax. 
 
It will undertake compliance activity to target known tax scheme designers, promoters, individuals and businesses who participate in such arrangements. 
 
The Assistant Treasurer has asked Treasury to consult with the National Tax Liaison Group's Trust Consultation Sub-group on the most appropriate way to progress the measure and, in particular, to address integrity concerns arising from the mismatch between trust and tax concepts of income. 
 
Source: Budget Paper No 2, p 43; Assistant Treasurer's press release "ATO Taskforce to target trust misuse", 14 May 2013.

 
Expanding data matching with third party information

The government will provide $77.8m over four years to the Tax Office to improve compliance by expanding data matching with third party information. This measure is estimated to have a gain to revenue of $610.2m over the forward estimates period. 
 
The information provided to the Tax Office will also improve the pre-filling of tax returns. 
 
The measure will establish new and strengthen existing reporting systems for: 
•    taxable government grants and specified other government payments 
•    sales of real property, shares (including options and warrants), and units in managed funds 
•    sales through merchant debit and credit services 
•    managed investment trust and partnership distributions, company dividend and interest payments, and 
•    transactions reported to the Tax Office by the Australian Transaction Reports and Analysis Centre. 
 
Source: Budget Paper No 2, p 44.
  
  
Speak with our Financial Advisors with regards to how this budget may impact you, your family and your business. 
 

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