ASPECTS OF FINANCIAL PLANNING. Federal Budget 2012 May This Aspect covers features of the 2012 Federal Budget that impacts on our clients.

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1 ASPECTS OF FINANCIAL PLANNING Federal Budget 2012 This Aspect covers features of the 2012 Federal Budget that impacts on our clients.

2 Background On 8, the Deputy Prime Minister and Treasurer, the Hon. Wayne Swan MP, delivered his fifth Federal Budget and second for the Gillard Government. There were fewer surprises as many of the measures had already been legislated or preannounced. Mr Swan promised to deliver a surplus of $1.5 billion in 2012/13, being the first surplus since the global financial crisis and since Labor came to power in This Budget is termed the fair go budget or the battler s budget as it aims to spread the benefits of the mining boom by using the mining tax to help low and middle-income families and the elderly, through increased payments to families and an allowance for eligible income recipients. Our primary concern is the practical effect that the Federal Budget will have on Centric Wealth clients. The following areas of the Budget are those which may be of significant interest to our clients. Personal taxation New resident personal tax rates 2012/13 On a positive note, the tax free threshold has effectively been tripled from $6,000 to $18,200 from 1 July 2012, taking up to one million people out of the tax system. The tax thresholds and rates applicable from 1 July 2012 are provided in the table below. Note that the highlighted figures represent the changes between this financial year and next. 2011/ /13 Tax thresholds Tax rates Tax thresholds Tax rates $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, % $80,001 - $180,000 37% $80,001 - $180,000 37% $180, % $180, % Further, from 1 July 2012, the low income tax offset (LITO) will be reduced as follows: 2011/ /13 Maximum offset $1,500 $445 Lower income threshold* Upper income threshold^ $30,000 $37,000 $67,500 $66,667 Reduction rate $0.04 per $1 $0.015 per $1 This means that no tax is payable by an adult resident taxpayer if income is $20,542 or less, which is an increase from the current level of $16,000; and Changes to tax thresholds and rates may affect existing salary sacrifice, transition to retirement and/or margin lending strategies. More disposable income can assist to increase your wealth accumulation strategies and it is worthwhile reviewing your position in light of the threshold and tax rate changes. Medicare levy low income thresholds The Government will increase the Medicare levy low income thresholds to keep low-income earners exempt from paying Medicare Levy. The following table shows the Medicare levy income thresholds for 2011/12: Individuals $19,404 Families $32,743 Single pensioners below age pension age No Medicare if taxable income is equal to or less than $30,451 The additional amount of threshold for each dependent child or student will also increase to $3,007. Further, this increase will ensure that pensioners below age pension age do not pay the Medicare levy when they do not have an income tax liability. Better targeting of the ETP tax offset The Government will make the taxation of employment termination payments (ETP) fairer. ETPs will be added to a person s other taxable income. If a person s total taxable income (including the ETP) is under $180,000, the concessional tax rates on ETPs will be available. That is, the normal lump sum tax rates for ETPs will apply to the portion of income under the total income limit of $180,000. Amount above this whole-of-income cap will be taxed at normal marginal tax rates (currently 45% plus Medicare). Bona fide redundancy, invalidity, certain compensation payments and death payments will not be subject to these changes. This measure will apply from 1 July * Income level in which LITO begins to be reduced at ^ Income level in which you are no longer eligible for LITO

3 For high income earners or taxpayers with large amounts of accrued leave who negotiate or receive an ETP, the timing of the payment is important. Terminating later in the financial year will mean these taxpayers will have more taxable income and may be caught by the proposed measure. Living away from home allowances and benefits The Government will further reform the tax concession for living away from home allowances and benefits by better targeting it at people who are legitimately maintaining a second home in addition to their actual home for an initial period. This measure will: Limit access to the tax concession to employees who maintain a home for their own use in Australia, that they are living away from for work; and Provide the tax concession for a maximum period of 12 months in respect of an individual employee for any particular work location. These further reforms will stop employers from being able to give the tax concession to employees who aren t maintaining a second home, or are maintaining two homes indefinitely. The reforms will apply from 1 July 2012 for arrangements entered into after 7.30 pm (AEST) on 8, and from 1 July 2014 for arrangements entered into prior to that time. Clients who receive this allowance may see a drop in their take home pay once the allowance is abolished. This may require clients to review their expenses and it may warrant a salary review if travel plays a big part in client s role. Changes to the net medical expenses tax offset The Government will introduce a means test for the net medical expenses tax offset (NMETO) from 1 July For people with adjusted taxable income above the Medicare levy surcharge thresholds ($84,000 for singles and $168,000 for couples or families in 2012/13), the threshold above which a taxpayer may claim NMETO will be increased to $5,000 (indexed annually thereafter) and the rate of reimbursement will be reduced to 10% (from 20% in 2011/12) for eligible out of pocket expenses incurred. Some examples of eligible medical expenses include doctor, dentist and optometrist fees, hospital fees and most aged care fees. People with income below the surcharge thresholds will be unaffected. Consolidate the dependency offsets into one The Government will consolidate eight dependency tax offsets into a single, streamlined and non-refundable offset that is only available to taxpayers who maintain a dependant who is genuinely unable to work due to a carer obligation or disability from 1 July The offsets to be consolidated are the invalid spouse, carer spouse, housekeeper, housekeeper (with child), childhousekeeper, child-housekeeper (with child), invalid relative and parent/parent-in-law tax offsets. Mature age worker offset phase out The Government will phase out the mature age worker tax offset (MAWTO) from 1 July 2012 for taxpayers born on or after 1 July Access to the MAWTO will be maintained for taxpayers who are aged 55 years or older in 2011/12. Changes to tax rates for non-residents The Government will adjust the personal income tax rates and thresholds that apply to non-residents Australian income. This will ensure that they better align with the rates and thresholds that will apply to residents. The tax thresholds and rates applicable from 1 July 2012 are provided in the table below. Note that the highlighted figures represent the changes between this financial year and next. Tax thresholds 2011/ /13 Tax rates Tax thresholds Tax rates $0 - $37,000 29% $0 - $80, % $37,001 - $80,000 $80,001 - $180,000 30% 37% $80,001 - $180,000 37% $180, % $180, % Further, the managed investment trust withholding tax rate will be increased from 7.5% to 15%. Removal of the CGT discount for non-residents The Government will remove the 50% capital gains tax (CGT) discount for non-residents on capital gains accrued after 7.30 pm (AEST) on 8. The CGT discount will remain available for capital gains accrued prior to this time where non-residents choose to obtain a market valuation of assets as at 8. This is of particular importance to expatriate Australians, who, in addition to real property, may hold shares and other investments that are subject to CGT. For those who are about to become non-residents, consideration needs to be given about electing to pay, or not to pay, CGT on unrealised gains on becoming a non-resident.

4 50% discount for interest income abolished The Government will not proceed with the 2010/11 Budget measure Stronger, fairer, simpler tax reform - 50% discount for interest income which was due to commence on 1 July Standard deduction abolished The Government will not proceed with the 2010/11 Budget measure Stronger, fairer, simpler tax reform - standard deduction for work-related expenses and the cost of managing tax affairs which was due to commence on 1 July Company taxation Company tax cut abolished The Government will not proceed with the measure to lower the company tax rate, from the 2013/14 income year, nor implement an early start to the company tax rate cut for small businesses from the 2012/13 income year. The Government has decided to direct the savings from not proceeding with the company tax cut towards funding other Government priorities, including boosting productivity through a loss carry-back arrangement for companies and measures to alleviate cost of living pressures for households. Company loss carry-back The Government will provide tax relief for companies by allowing them to carry-back tax losses so they receive a refund against tax previously paid. A one year loss carry-back will apply in 2012/13, where tax losses incurred in that year can be carried back and offset against tax paid in 2011/12. For 2013/14 and later years, tax losses can be carried back and offset against tax paid up to two years earlier. Companies will be able to carry back up to $1 million of losses each year. This will provide a cash benefit of up to $300,000 a year. It will be available to companies and entities that are taxed like companies. It will apply to their revenue losses only and will be subject to integrity rules, and limited to a company s franking account balance. Superannuation Deferral of higher concessional contributions cap The start date of increasing the concessional contribution (CC) caps for individuals over 50 with low superannuation balances will be deferred by two years, from 1 July 2012 to 1 July Under the proposed higher CC cap measure, individuals aged 50 and over with superannuation balances below $500,000 will be able to make up to $25,000 more in CCs than allowed under the general CC cap. In 2014/15, the general cap is likely to increase to $30,000 through indexation, and the higher cap would then commence at $55,000. Consider taking full advantage of the current CC cap by making CCs of up to $50,000 before 30 June 2012 Review salary sacrifice arrangements from 1 July 2012 to ensure you do not exceed the $25,000 CC cap Clients who have implemented a salary sacrifice and transition to retirement strategy should review their contribution and income payments Consider making non-concessional contributions if you are impacted by the CC cap reduction; and Super may be less effective for clients over age 50 who need to contribute large amounts to catch up on savings. These clients may wish to explore alternative strategies. Concession for superannuation contributions reduced for high income earners The tax concession which very high income earners receive on their CCs will be reduced, so it is more in line with the concession received by average income earners. Currently, the 15% flat tax on CCs provides high income earners with a significantly larger tax concession than those on lower marginal tax rates. From 1 July 2012, individuals earning greater than $300,000 will pay an additional 15% tax (excluding the Medicare levy) on CCs. The definition of income for the purpose of this measure includes taxable income, concessional superannuation contributions, adjusted fringe benefits, total net investment losses, target foreign income, tax-free government pensions and benefits, less child support. If CCs themselves push a person over the $300,000 limit, the higher rate of tax will only apply to the part of the contributions that are in excess of the threshold. CCs means all employer contributions (both superannuation guarantee and salary sacrifice), deductible personal contributions and notional employer contributions for defined benefit members. Excess CCs will only be subject to excess contributions tax not the additional 15% tax. Treasury will consult with the superannuation industry and other relevant stakeholders on further design and implementation details. It is estimated this measure will affect around 128,000 people in 2012/13, or 1.2% of people contributing to superannuation. The two year deferral means that for 2012/13 and 2013/14, all individuals will be subject to a CC cap of $25,000 per year.

5 The overall impact of this measure will be to increase the tax burden by up to $3,750 (ie. $15% of $25,000) on CCs made by very high income earning taxpayers The clients that will benefit most from this measure are those on the highest marginal tax rate, earning incomes between $180,000 and $299,999 as they will not be subject to the additional 15% tax on CCs; and Although superannuation remains an effective way to save for retirement for most people, it does become less effective for very high income earners from 1 July This may require a review of salary sacrifice arrangements, including transition to retirement strategies. Capital gains tax and loss relief to facilitate superannuation reforms The Government will amend the law to ensure that income tax considerations do not prevent mergers of superannuation funds or transfers of existing default members balances and relevant assets in the transition to Stronger Super and MySuper. From 1 June 2012 to 1 July 2017, optional loss relief will be available for mergers of complying superannuation funds on the same terms and conditions as the former temporary loss relief that applied from 24 December 2008 to 30 September Further, from 1 July 2013 to 1 July 2017, an optional roll-over and loss relief will be made available for capital gains and capital losses on mandatory transfers of default members balances and relevant assets to a MySuper product in another complying superannuation fund. The Government has confirmed that self managed superannuation funds (SMSF) have been excluded from the relief because MySuper requirements do not apply to these funds. Self managed superannuation funds SMSF auditor registration The Government will provide $10.7 million over four years to the Australian Securities and Investments Commission (ASIC) to develop and maintain an on-line registration system for auditors of SMSFs. These changes implement the recommendations of the independent Super System Review (Cooper Review) of superannuation. They are designed to ensure high standards from the audit professionals who are at the forefront of ensuring that the SMSF sector is well managed. As part of the registration process, ASIC will develop a competency exam for SMSF auditors. ASIC will also be responsible for the deregistration of non-compliant auditors. Auditors may begin to register with ASIC from 31 January The Government will also provide $10.6 million over five years to the Australian Taxation Office (ATO) to police registered auditors, check their compliance with competency standards set by ASIC and refer auditors to ASIC, for enforcement action. The cost of this measure will be offset by increases in the SMSF levy and fees charged by ASIC for sitting the competency exam. This announcement will likely result in increased costs for SMSFs due to an increase in the annual SMSF levy and auditors seeking to pass on the costs associated with the new registration requirements. At this stage the Government has not indicated what the increase in the SMSF Levy will be. Social security Commonwealth seniors health card The Government will streamline income reporting processes for holders of the Commonwealth seniors health card (CSHC) who are no longer required to lodge a tax return as a result of the Government s tripling of the tax free threshold from 1 July This will allow people in the $6,000 to $18,200 income range to update their incomes online, over the phone or in person with the Department of Human Services (DHS) so that their CSHC eligibility can be determined. DHS will continue to access tax information collected by the ATO, such as pre-fill income, earnings and interest details, to ensure accuracy of income reporting. The new approach will help to ensure that CSHC holders receive their correct entitlements. Aged care Living longer living better In April 2012, the Government released its view on the reforms for the aged care sector in a paper titled Living longer living better. The paper proposed major changes to the funding and structure of aged care and in the 2012 Federal Budget, the Government reiterated some of the main changes, such as: Increased options to help retirees receive care in their own homes. The number of home care packages will increase by nearly 40,000 over the next 5 years Introduction of a new income test from 1 July 2014 for home care packages. Full pensioners will not pay an income tested fee. Part pensioners will pay up to $5,000 pa and self-funded retirees will pay up to $10,000 pa Removal of distinction between low care and high care and changes to service packages facilities can provide From 1 July 2014, fees for aged care residents will be capped at a maximum of $25,000 pa and $60,000 over their lifetime. Caps will also apply to payments made towards the cost of home care packages, which will also

6 count towards the $60,000 lifetime limit All residents who enter permanent care from 1 July 2014 will have the choice to pay for accommodation costs by either a refundable lump sum payment, periodic payments or a combination of both; and Residents in permanent care at 30 June 2014 will not be affected by the changes. Conclusion It is important to remember that these measures do not come into force until they are made into law. Noting that the Government does not control the House of Representatives or the Senate it is highly likely that some of these measures may be amended or denied by Parliament. We will be keeping our eye on the progress or changes to these measures. Your Centric Wealth adviser is able to discuss these measures with you in further detail. How to Contact Centric Wealth Advisers Ltd Sydney Melbourne Brisbane Canberra Level 9 60 Castlereagh Street Sydney NSW 2000 Level 14P 530 Collins Street Melbourne VIC 3000 Level Edward Street Brisbane QLD 4000 Mezzanine Level 55 Wentworth Avenue Kingston ACT 2604 Tel Fax Tel Fax Tel Fax Tel Fax info@centricwealth.com.au This article has been prepared for clients of Centric Wealth Advisers Limited ABN AFSL (Centric Wealth) and others on request. The article is based upon generally available information and is not intended to be, or to replace specialist advice in the areas covered but rather, the article is intended to be informative and educational only. Centric Wealth, its associates, representatives and authorised representatives shall to the maximum extent permitted by law disclaim liability, directly or indirectly, for any loss or damage caused to you in respect of the information provided in this article. This article may contain general advice which is defined in the Corporations Act to mean that we have not taken into account any of your personal circumstances, needs or objectives. It is therefore imperative that you determine, before you proceed with any investment or enter into any transactions, whether the investment or transaction is suitable for you in consideration of your objectives, financial situation or needs and you must therefore, before acting on any information included in this article, consider the appropriateness of the information having regard to your personal situation. Centric Wealth recommends that you obtain financial and tax or accounting advice based on your personal situation before making an investment decision.