Federal budget 2012/13 9 May 2012 It was a budget that had one goal a surplus or bust. To do it, the Government has put a stop to the drop in the company tax ($4.8 billion over four years), sliced $2.4 billion of tax concessions out of superannuation over four years, ditched the 50 per cent tax discount for interest and also the standard tax deduction for employment expenses (another $2.4 billion over the four years). All this and the Treasurer only mentioned working families once (the record for working families bingo is still held by the 2008 budget speech when the Treasurer mentioned working families ten times). At first glance, this budget is going to mean more work for financial advisers. Many clients financial plans will be up in the air with the changes to superannuation. Specifically, the extra 15 per cent contributions tax which will apply to those on incomes over $300,000 and the very worrying drop in the concessional contribution cap to $25,000 for those aged 50+ in 2012/13 and 2013/14 tax years. The concessional contributions cap will only increase to $50,000 ($55,000 after indexation) from 1 July 2014. No prizes for predicting an excess contribution tax spike for unwary older employees who salary sacrifice over $25,000 into super after July this year. Also, those clients leaving employment with golden handshakes from 1 July 2012 may find they are facing a nasty tax bill, as the tax rebate for employment termination payments (ETPs) will be slashed from 2012/13. Mr Swan regurgitated initiatives from last year s budget as though they were breaking news. Examples of this included the increase to the tax-free threshold that starts on 1 July 2012 and the national disabilities scheme. Even the increase to the superannuation guarantee got a mention. There was a strong focus on the savings in the Budget from previous initiatives that they have decided not to go through with or to defer. But it is not all bad news for everyone. ASIC and APRA will receive more funding to implement FoFA and superannuation reforms (but of course the industry will be footing these bills via increased levies for Super Stream through a new temporary Super Stream levy). This document contains a summary of the key issues arising from the budget and how they will impact financial advisers and their clients. Contents Increased funding to regulators 2 Superannuation 2 Redundancy payments 4 Taxation 5 Companies and finance 7 Non-resident tax payers 7 Centrelink 9 Aged care 11
Increased funding to regulators Over the next four years, ASIC will receive an additional $180 million to oversee financial markets including $24 million to implement FoFA reforms and $11 million to implement a system of SMSF auditor registration. New license fees for an AFSL will increase from $287-$575 to $1,485 (company) to help pay for the reforms. Annual fees will increase by 56 per cent from $351 to $549 (company). The ATO will receive a further $347 million over four years in funding to implement the Super Stream reforms, while APRA will be collecting an extra $385 million in levies over the same period to pay for it. APRA will also be receiving a further $82 million over four years, that will be recouped from APRA levies. Our comment: Although few would argue that the regulators will need more funding to implement the huge financial services and superannuation reforms, it is disappointing that the industry will yet again bear this cost. Superannuation One cap fits all from 1 July 2012: No higher concessional contributions cap for over 50s The Government announced that the previous commitment for a higher concessional contribution cap for people over age 50 with balances below $500,000 will be deferred until 1 July 2014. The concessional contribution cap of $25,000 for all people will apply from 1 July 2012. From 1 July 2014 the standard concessional contribution cap is likely to have increased to $30,000 as a result of indexation, while the higher cap would be $55,000. The announcement of the deferral of the higher contribution cap means that the uncertainty has now ended for the next two years the concessional contribution cap is $25,000 regardless of age and account balance. Our comment: The current concessional contribution cap will expire at 30 June 2012 and it is important to recognise that this is already legislated and does not need to be passed via Parliament. The deferral will impact your clients who are salary sacrificing into super and employing a transition to retirement strategy. You should be contacting all of your clients over 50 to ensure their concessional contributions remain within the $25,000 cap. You should also remember the opportunity to revisit contribution splitting from the 2011/12 financial year. This budget announcement does not address any of the unanswered questions regarding how the Government s previous commitment (which has been deferred) will operate and how balances will be calculated. This leaves uncertainty as to whether there may be opportunities for clients to withdraw superannuation and/or make spouse contributions to avail themselves of the higher cap. This will have an obvious impact on your clients wealth accumulation strategies. Many advisers will be used to the pressures of reduced contribution caps and will need to start considering the circumstances that would warrant alternative wealth accumulation strategies (such as gearing) to overcome retirement funding gaps. 2
Reduction of superannuation tax concession for contributions from very high income earners From 1 July 2012, clients with income greater than $300,000 will pay additional tax on their superannuation contributions. The Government estimates that this measure will affect around 128,000 people in 2012/13, or 1.2 per cent of people contributing to superannuation. The definition of income will include concessional superannuation contributions. If an individual s income, excluding their concessional contributions, is less than the $300,000 threshold, but the inclusion of their concessional contributions puts them over the threshold, the additional tax will only apply to the part of the contributions that is in excess of the $300,000. The additional tax will not apply to concessional contributions which exceed the concessional contributions cap as they are already subject to excess contributions tax of 46.5 per cent. Our comment: This announcement will lead to yet another round of Treasury consultation with the superannuation industry regarding the finer details of how it will actually work. However, it is positive news that the additional tax will not exceed the maximum marginal tax rate of 46.5 per cent. Capital gains tax rollover relief for superannuation funds As previously announced, superannuation funds which merge as a result of Stronger Super and My Super reforms will continue to be able to carry forward capital losses until 30 June 2017. This represents an extension of the previous relief which was scheduled to end on 30 June 2012. Our comment: This measure will assist funds who are contemplating mergers to increase efficiencies. You should be aware that these measures do not extend to self-managed super funds. SMSF auditor registration The Government will provide funding to ASIC to develop and maintain an online registration system for auditors of SMSFs which is designed to ensure high professional standards from auditors. 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 2013. The Government will also provide $10.6 million to the ATO to: police registered auditors check their compliance with competency standards set by ASIC 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. Our comment: Although the SMSF industry was primarily found by the Cooper review to be functioning effectively and efficiently, these measures will assist in improving the transparency of the SMSF compliance and auditing process. 3
Redundancy payments Reduced tax offset for certain employment termination payments The Government will limit the availability of the employment termination payment (ETP) offset. The tax offset can currently be used to reduce tax payable on payments included in remuneration packages, such as golden handshakes which are not related to termination of employment due to genuine redundancy or invalidity. From 1 July 2012, the ETP tax offset will be calculated using a person s total annual taxable income including the ETP. This means if the person s total annual taxable income is below the $180,000 whole of income cap, the person will receive the standard ETP tax offset (where the ETP is taxed at a maximum tax rate of 15 per cent for those over preservation age and 30 per cent for those under preservation age). For clients who have total annual taxable income (including the ETP) which exceeds the $180,000 whole of income cap, the amount of the ETP which pushes the total annual taxable income above $180,000 will be taxed at marginal rates. The $180,000 whole of income cap will work in conjunction with the existing ETP cap ($175,000 in 2012/13, indexed). The ETP tax offset ensures that ETPs up to the ETP cap are taxed at a maximum tax rate of 15 per cent for those over preservation age and 30 per cent for those under preservation age. Existing arrangements will be retained for certain ETPs relating to genuine redundancy (including to those aged 65 and over), invalidity, compensation due to an employment-related dispute and death. For example, 45 year old Fred earned $50,000 for the first seven months of the 2012/13 and then received a golden handshake ETP of $150,000. This means his total annual taxable income is $200,000 which is $20,000 above the $180,000 whole of income cap. Although the ETP of $150,000 is below the $175,000 ETP cap, Fred will only have $130,000 of the ETP taxed at the maximum of 30 per cent, the remaining $20,000 will be taxed at the top marginal rate. Our comment: Any strategies regarding delaying a redundancy into the new financial year need to take this change into account. You need to weigh up the opportunity to access the current transitional employment termination payment rules which end at 30 June 2012. It is worthwhile to reinforce that a client who receives a bona fide redundancy should not impacted by this change. Based on the budget announcement, we believe the above analysis and example reflects the Government s intention. Further clarification will be provided when the Government releases draft legislation. 4
Taxation The following has been abandoned: The $500 standard deduction for work-related expenses. The 50 per cent tax discount on up to $1,000 of interest income earned by individuals. The proposed lowering of the company tax rate from 2013/14 and from 2012/13 for small businesses. Net medical expenses tax offset From 1 July 2012, individuals 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 net medical expenses tax offset will be increased to $5,000 (indexed annually) and the rate of reimbursement will be reduced to 10 per cent for eligible out of pocket expenses incurred. Dependency tax offsets From 1 July 2012, the invalid spouse, carer spouse, housekeeper, housekeeper (with child), child-housekeeper, child-housekeeper (with child), invalid relative and parent/parent-in-law tax offsets will be consolidated into a single, non-refundable offset only available to taxpayers who maintain a dependant who is genuinely unable to work due to carer obligation or disability. The new consolidated offset will be based on the highest rate of the existing offsets it replaces, taxpayers who are currently eligible to claim more than one offset amount in respect of multiple dependants who are genuinely unable to work will still be able to do so. Mature age workers tax offset The mature age workers tax offset (MAWTO) will be phased out for taxpayers born on or after 1 July 1957. Individuals who currently receive the MAWTO will not be affected. Access to the MAWTO will be maintained for individuals who are aged 55+ in 2011/12. Medicare levy low income threshold From 1 July 2011, the Government will increase the Medicare levy low income thresholds to $19,404 for individuals and $32,743 for families. The threshold for each dependent child or student will also be increased from $2,919 to $3,007. The Medicare levy threshold for single pensioners below age pension age will also increase to $30,451 to ensure they do not pay the Medicare levy when they do not have an income tax liability. From 1 July 2012, the low income threshold for this group will be fixed at the level applicable to seniors entitled to the senior Australians tax offset. Flood levy exemption The temporary flood and cyclone reconstruction levy exemptions are extended to individuals who were eligible for an Australian Government Disaster Recovery Payment (AGDRP) in 2010/11 (even if they did not apply for and receive payment) and some individuals affected by a natural disaster in 2011/12. Specifically where they are one of the following: eligible for an AGDRP for a disaster event directly affected by a Natural Disaster Relief and Recovery Arrangements (NDRRA) declared disaster and would have met the AGDRP criteria a New Zealand non-protected special category visa holder who received an ex-gratia payment from the Australian Government in relation to a disaster that occurred. The Government introduced the temporary flood levy for 2011/12 only to contribute towards rebuilding costs following the natural disasters that affected Australia in 2010/11. 5
Education expenses tax offset Families receiving Family Tax Benefit (FTB Part A) can claim a 50 per cent refund every year for key education expenses up to $794 (ie maximum refundable tax offset of $397 per child) for each primary school student and $1,588 (ie maximum refundable tax offset of $794 per child) for each secondary school student. The payment will go directly to parents who qualify for FTB Part A, and to young people in school receiving the Youth Allowance and some other income support and veterans payments. On 1 January 2013, the education expenses tax offset will be replaced with a new Schoolkids Bonus of $410 pa for each primary school student and $820 pa for each secondary school student. It will be paid in two equal instalments in January and July each year. For the 2011/12 financial year, the education expenses tax offset will be paid out in full to eligible families in June 2012. Our comment: For families who qualify for FTB Part A, these amounts are slightly more than the maximum allowable claim under the education tax offset. It appears that this payment is on top of the lump sum payment (clean energy supplement) and income tax cuts outlined under the carbon tax assistance package. Because the payment is automatic and upfront, it means parents will not be required to maintain education-related receipts and don t have to pay out of their own pocket first and then have to claim it back via the tax return as with the education tax offset. The Government expects it to benefit an extra one million families, who didn t claim what they were entitled to. Our overall comment: This budget is primarily focussed on a return to surplus. Around the edges there are a number of small taxation refinements but the emphasis is on either removing previously announced tax concessions or reduced tax rates (such as the company tax rate reduction). The loss carry back scheme will be welcomed by small businesses but it has no direct correlation to financial advice. Socially oriented tax offsets have been refined and in some instances improved. 6
Companies and finance Company tax loss carry back provisions Companies will be allowed to carry back up to $1 million of tax losses in 2012/13 to offset tax paid in 2011/12 to get a refund of previously-paid tax. From 2013/14, tax losses can be carried back and offset against tax paid up to two years earlier. Losses of up to $1 million can be carried back each year. The carry back provisions also apply to entities taxed like a company, but are only applicable to revenue losses and limited to a company s franking account balance. Living away from home allowance The tax concession for living away from home allowance and benefits will be limited to employees living away from a home maintained in Australia and will only be available for a maximum period of 12 months in respect of an individual for any particular work location. Our comment: This will have an impact on long-term contracts for employees working interstate or overseas. Your clients may need to consider the impact of this change in monetary terms and reflect this within their contractual negotiations. Non-resident tax payers Increased marginal tax rates From 1 July 2013, the personal income tax rates and thresholds that apply to non-residents Australian income will be adjusted. The first two marginal tax rate thresholds will be merged into a single threshold. The marginal tax rate for this threshold will be 32.5 per cent and will apply to all taxable income below $80,000. From 1 July 2015, this rate will rise to 33 per cent. Our comment: Overall this is a negative development for highly mobile skilled and professional workers who are working within Australia to fill the labour force shortfalls in key segments. Increase in managed investment trust final withholding tax rate The Government will increase the managed investment trust final withholding tax rate from 7.5 per cent to 15 per cent, with effect from 1 July 2012. This partially reverses a 2009/10 budget decision to lower the tax from 30 per cent to 7.5 per cent. Our comment: This is a negative outcome for countries that have an exchange of information agreement with Australia. An increase in the final withholding tax rate from 7.5 per cent to 15 per cent means increased revenue for the Australian Government but may be a disincentive for overseas investors. Removal of the capital gains tax discount for non-residents The Government will remove the 50 per cent capital gains tax (CGT) discount for non-residents on capital gains accrued after 7.30pm (AEST) on 8 May 2012. 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 May 2012. Our comment: If a foreign resident disposes of a taxable Australian property (such as land or a building) after 8 May 2012 which was purchased after 12 December 2006, the 50 per cent discount will not apply when calculating the amount of capital gains tax payable. It is important to recognise this will impact foreign residents who purchase land or buildings but not managed funds or publicly traded shares on an Australian stock exchange. 7
Company tax rate cut will not proceed The Government will not proceed with the measure to lower the company tax rate to 29 per cent, from the 2013/14 financial year. The Government will also avoid commencing the early start to the company tax rate cut for small businesses from the 2012/13 income year. Our comment: The sustained 30 per cent tax rate means this will have an impact on clients who have a company or who have an insurance bond investment. The use of companies to warehouse income and tax-effectively accumulate wealth within an insurance bond remains relevant to avoid personal income tax rates (including the 30 per cent marginal tax rate which is set to increase to 34 per cent from 1 July 2012). Standard deductions will not proceed The Government has decided to not proceed with the 2010 budget announcement to provide individual taxpayers with an optional standard tax deduction. As part of the Mid-Year Economic and Fiscal Outlook 2011-12 (MYEFO) released on 30 November 2011, the Government announced the measure would be deferred. The $500 standard deduction was previously scheduled to apply from 1 July 2013 and to then increase to $1,000 from 1 July 2014. Our comment: The Henry Tax Review recommended a wide number of changes to the lodgement of tax returns including no requirement to lodge tax returns for standard PAYG employees without complicated taxation matters. Scrapping the above change from 1 July 2012 means the first step in this direction will not be realised. Interest income tax discount will not proceed The Government will not proceed with the 2010 budget announcement with the 50 per cent tax discount on up to $1,000 of interest income earned by individuals which was due to commence on 1 July 2013. This announcement was originally set to commence from 1 July 2011, however, it was amended in the 2010/11 MYEFO and again in the 2011/12 MYEFO. Our comment: The Henry Tax review originally recommended a broad 40 per cent discount on interest income to provide concessional taxation treatment to Australians accumulating savings. Responding to this recommendation, the Government made the above limited announcement, however removing this announcement may result in more taxation for clients who have increased the level of their savings since 2006 due to the global financial crisis. 8
Centrelink Liquid asset waiting period increase in the maximum reserve amount From 1 July 2013, the Government will increase the maximum reserve amount for the liquid assets waiting period (LAWP). A single person without dependents will have an increased maximum reserve amount of $5,000 (up from $2,500), while a person who is a member of a couple and/or has a dependent child will have an increased maximum reserve amount of $10,000 (up from $5,000). The revised maximum LAWP waiting period (13 weeks) applies to affected clients if their level of liquid assets is above the amounts listed below: Liquid assets Single with no dependents Couple or single with dependents $11,500 (up from $9,000) $23,000 (up from $18,000) Mature age participation job seeker assistance From July 2012, the Government will provide assistance over four years to job seekers aged 55+ who are unemployed and would like help to re-enter the workforce. This measure also includes incentives of up to $500 per job seeker for items associated with job preparation, for example internet connection or other IT-related hardware. Our comment: Although this measure will assist mature job seekers to return to work, once they get work the Government will be phasing out the $500 mature age tax offset! Parenting payment changed eligibility for 1 July 2006 grandfathered recipients From 1 January 2013, all parenting payment recipients who were on payment prior to 1 July 2006 will be assessed under the same eligibility requirements as new parenting payment recipients. Under this measure grandfathered recipients with their youngest child aged 6+ (for partnered recipients) or 8+ (for single recipients) will cease to be eligible for parenting payment and will transition onto the Newstart Allowance (NSA) unless they move into employment. Parents who transition onto the Newstart Allowance will be eligible for a more generous income test taper that will take effect from 1 January 2013. The new more generous income test reduces Newstart payments by 40 cents (rather than the previous 50 cents) for every dollar of income earned above the income-free area (currently $62 per fortnight). Our comment: This measure will align parenting payment eligibility for all parents, encourage re-entry into the workforce and make the system fairer through reduced financial disincentives to engage in paid work. By moving to Newstart Allowance, parents may continue to receive the ongoing carbon tax compensation (the clean energy supplement). Further, Newstart recipients may also be entitled to the new income support supplement discussed below. The enhanced income tests for NSA will allow carer parents to earn around $400 more per fortnight, before ceasing eligibility for this payment. 9
New income support supplement From 20 March 2013, over four years the Government will provide for a new supplement for eligible income support recipients to assist with cost of living pressures. The supplement will be an ongoing, non-taxable payment to recipients of many allowances. The new supplement will provide $210 pa for eligible singles and $175 pa for each member of an eligible couple. Our comment: It appears that this supplement is on top of the lump sum payment (clean energy supplement) and income tax cuts outlined under the carbon tax assistant package. Family Tax Benefit Part A change to age of eligibility From 1 January 2013, the Government will limit eligibility for FTB Part A to young people under 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 Part A may be eligible to receive Youth Allowance subject to usual eligibility requirements. Our comment: This change will focus on families with children who are at school, while Youth Allowance will become the primary form of assistance to eligible young adults aged 18 and over. You may need to help clients with eligible young adults aged 18 and over to understand the different eligibility rules and income and asset tests for the Youth allowance. Increasing the rate of Family Tax Benefit Part A The maximum payment rate of FTB Part A will increase by $300 pa for families with one child and $600 pa for families with two or more children. For families receiving the base rate of FTB Part A, the increase will be $100 pa for families with one child and $200 pa for families with two or more children. Our comment: These benefits are on top of the lump sum payment (clean energy supplement) and income tax cuts outlined under the carbon tax assistant package. You should help clients to understand the eligibility and income test rules for FTB Part A. Parents receiving FTB Part A will also get the new Schoolkids Bonus outlined on page 6. National Disability Insurance Scheme to launch in 2013 From July 2013, a National Disability Insurance Scheme (NDIS) is expected to be set up to assist people with significant and permanent disability to receive lifetime care and support, regardless of how they acquired their disability. The new National Disability Transition Agency, will be established to run the delivery of care and support to people with disability, their families and carers in selected locations. Our comment: This is a long awaited measure for families with disabled members. Portability of Australian Government payments From 1 January 2013, the period of time that people who travel overseas and continue to be paid will be reduced from 13 to 6 weeks for most income support and family payment recipients. Beneficiaries who are outside Australia on the date of implementation will retain the 13 week portability of their payments until they return to Australia. Our comment: This change won t affect the age pension or disability support pension recipients who have been assessed under new rules from 1 July 2012 as having a severe and permanent disability and no future work capacity. 10
AET 2012/13 Budget Update Aged care Aged care reform (this was previously announced prior to the budget) In response to last year s Productivity Commission report which proposed ways to reform the aged care industry, the Government has announced a $3.7 billion Living Longer. Living Better plan to reshape the aged care sector over ten years (generally commencing from 1 July 2014). Whilst many of the Productivity Commission proposals have been adopted, some of the more unpalatable measures, such as changes to the means testing of the principal homes and the removal of Centrelink exemptions on accommodation bonds, have been rejected. There is a strong emphasis on making it easier for older Australians to stay in their home while they receive care and a tighter means test to assess home care and residential care fees. This is likely to mean that part-pensioners and self-funded retirees may end up paying higher fees. Note: Many of the proposals including the means testing changes will not affect existing home care and aged care residents already in the system or those entering care prior to 1 July 2014. If you have any questions or would like more information on estate planning, please call us on 1800 882 218. Australian Executor Trustees Limited ABN 84 007 869 794 AFSL No 240023 www.aetlimited.com.au Part of the IOOF group. This document is for financial adviser use only it is not to be distributed to clients. Not all measures announced in the Federal Budget may be enacted into law in the form announced. Australian Executor Trustees Limited does not undertake to notify recipients of any changes in the measures, the law or its interpretation. Examples are illustrative only and are subject to the assumptions and qualifications disclosed. No entity in the IOOF group gives any warranty of accuracy or reliability or accepts any liability for any loss or damage in connection with the use of, or reliance on, the information contained in this Federal Budget Update. PLA-4544 0512