One week after Budget 2013, here is an easy to read summary of the proposed changes, courtesy of our friends at Colonial First State.
If you have any queries regarding any of these changes, feel free to contact us to discuss further.
Introduction
Federal Treasurer Wayne Swan has handed down his sixth budget which confirms a range of recently announced proposed changes to superannuation, income tax and the Medicare Levy. It also announces a range of proposed changes to the social security and tax systems.
The key items which may be of interest for you and your employees include:
- Confirmation of superannuation reforms announced on 5 April 2013
- Increasing the Medicare levy by 0.5% from 1 July 2014
- Deferring 1 July 2015 tax cuts
- Phasing out the Net Medical Expenses Tax Offset
- Limiting tax deductions for self-education expenses
Confirmation of superannuation reforms
The Government had already announced its planned superannuation reforms on 5 April 2013, and reconfirmed the following:
Increasing the concessional contributions cap to $35,000 from:
-
- 1 July 2013 for those aged 60 and over
- 1 July 2014 for those age 50 and over
- Excess concessional contributions – from 1 July 2013
From 1 July 2013 individuals will be able to withdraw any excess concessional contributions made from their superannuation fund. Excess concessional contributions will be taxed at the individual’s marginal tax rate, plus an interest charge (recognising that excess contributions tax is collected later than personal income tax).
Taxing earnings in pension phase over $100,000 pa
From 1 July 2014, future earnings, including interest and dividends, on assets supporting an income stream liability will be tax free up to $100,000 a year for each individual and earnings above $100,000 will be taxed at 15%. To allow people time to restructure their super arrangements, special rules will apply for capital gains realised on assets purchased before 1 July 2014.
Deeming account based pensions
The Centrelink deeming rules that currently apply to financial investments such as bank deposits, shares and managed funds will also apply to new account based income streams from 1 January 2015.
Concessional taxation for deferred annuities
To encourage the take-up of deferred lifetime annuities, these products will have the same concessional tax treatment that superannuation assets supporting income streams receive.
Increasing the account balance threshold for certain lost super balances
The account balance threshold for certain inactive and uncontactable lost super members will be increased from $2,000 to $2,500 from 31 December 2015.
A further increase to $3,000 will apply from 31 December 2016.
Introducing a Council of Superannuation Custodians
The Government will establish a Council of Superannuation Custodians to ensure that any future changes to the super system can be assessed to ensure they are consistent with an agreed Charter of Superannuation Adequacy and Sustainability.
Colonial First State comment
As the Government had already announced its planned superannuation reforms on 5 April 2013, the Budget contained no further surprises for superannuation.
Increasing the Medicare Levy
From 1 July 2014 the Medicare Levy will be increased by half a percentage point from 1.5% to 2% to provide funding for DisabilityCare Australia.
Low-income earners will continue to receive relief from the Medicare levy through the low-income thresholds for singles, families, seniors and pensioners.
The current exemption from the Medicare Levy will also remain in place, including for blind pensioners and sickness allowance recipients.
Colonial First State comment
While this announcement will increase the amount of Medicare Levy people will pay on their taxable income, it will also increase the tax rates applicable to other amounts that include the Medicare Levy rate, including:
- Excess non-concessional contributions tax – 46.5% to 47%.
- Tax on the taxable component of a super lump sum benefit received by a taxpayer age 55 to 59 in excess of the low rate cap (currently $175,000) – 16.5% to 17%.
- Tax on the taxable component of a superannuation lump sum benefit received by a taxpayer under the age of 55 – 21.5% to 22%.
- Tax on the taxable component of a superannuation lump sum death benefit paid directly to a non-death benefits dependent.
- taxed element – 16.5% to 17%
- untaxed element – 31.5% to 32%
- Withholding tax where no TFN is provided – 46.5% to 47%.
- Fringe benefits tax – 46.5% to 47%.
The increase in the Medicare Levy may also improve the tax effectiveness of a number of strategies for your employees, such as:
- Making salary sacrifice and personal deductible contributions more tax effective, as the Medicare Levy does not apply to these amounts. Delaying the withdrawal of any taxable component as a super lump sum benefit until after age 60 (as the Medicare Levy doesn’t apply)
- Arranging for a member’s death benefit to be paid to a non-death benefits dependent via the member’s estate (as the Medicare Levy doesn’t apply to deceased estates).
Deferring 1 July 2015 tax cuts
The Government has announced it will defer the tax cuts that were due to come into effect from 1 July 2015. As a result, marginal tax rates are proposed to remain at their current settings.
| Marginal tax rates that were legislated to apply from 1 July 2015 (now proposed to be deferred) | Current marginal tax rates (what the Govt now proposes from 1 July 2015) | ||
| Taxable income | Tax rate | Taxable income | Tax rate |
| 0 – $19,400 | 0% | 0 – $18,200 | 0% |
| $19,401 – $37,000 | 19% | $18,201 – $37,000 | 19% |
| $37,001 – $80,000 | 33% | $37,001 – $80,000 | 32.5% |
| $80,001 – $180,000 | 37% | $80,001 – $180,000 | 37% |
| $180,001 and over | 45% | $180,001 and over | 45% |
Phasing out the Net Medical Expenses Tax Offset
The Net Medical Expenses Tax Offset (NMETO) will be phased out with transitional arrangements for those currently claiming the taxation offset. The offset will continue to be available for taxpayers for out-of-pocket medical expenses relating to disability aids, attendant care or aged care until 1 July 2019.
Limiting tax deductions for self-education expenses
A $2,000 annual cap on tax deduction claims for work-related self-education expenses per individual will be introduced. Education expenses include formal qualifications and associated tuition fees, textbooks, stationery and travel expenses and also conferences, seminars and self-organised study tours.
There will be no change to employers receiving exemptions on fringe benefits tax for eligible education and training that they provide or fund for their employees, unless an employee decides to salary sacrifice in order to obtain these benefits.
Colonial First State comment
Self-education expenses such as attending conferences, travelling and accommodation can be quite expensive and easily lead to breach of the $2,000 cap. Your employees may also have to spread out self-education expenses over different financial years to stay within the annual limit and take full advantage of deductions, i.e. paying for a course in June and purchasing textbooks in July the following year.
Further clarification on proposed additional 15% tax on concessional contributions for high-income earners
The Government also announced that it will make minor amendments to the proposed reduction of tax concessions for the concessional contributions of very high-income earners.
As previously announced, from 1 July 2012 individuals with combined income and concessionally-taxed contributions exceeding $300,000 in an income year will be subject to an additional 15% tax on those concessional contributions (within their concessional contributions cap) that exceed the $300,000 threshold.
The minor amendments involve:
- Exempting the employer contributions of certain Federal judges as well as employer contributions made to constitutionally protected funds for certain State employees (to mitigate constitutional risks).
- Using a similar definition of income to that used when calculating whether an individual is liable to pay the Medicare levy surcharge.
- Refunding former temporary residents the tax paid under the measure as they effectively do not receive any concessional tax treatment on their contributions to superannuation as a result of the operation of other rules.