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On Tuesday, 13 May 2008, the Federal Treasurer, the Hon Wayne Swan MP, handed down the 2008-09 Federal Budget. Despite rumors that the superannuation system might have come in for some attention, the 2008-09 Federal Budget did not announce any substantive changes concerning superannuation. There were no changes to the current contributions regime, tax-free status for most benefits after age 60, transition to retirement pensions or the tax exemption for superannuation fund assets set aside to pay pensions. However, from a taxation and social security point of view, this Budget covered a wide range of matters.
Superannuation
1. FIRST HOME SAVER ACCOUNTS
First Home Saver Accounts (FHSAs) will be able to be offered by ADIs (banks, building societies and credit unions), life companies (including friendly societies) and Public Offer super fund trustees (as a separate trust — not as part of a super fund). The objective of this initiative is to assist Australians to save a deposit for the purchase of their first home by providing a Government contribution and concessional taxation of account earnings.
FHSAs will be able to be offered from 1 October 2008, although it is unclear at this stage whether providers will have products available by this date.
To be eligible to open an FHSA a person must:
- be between 18 and 65
- never have purchased or built a first home in Australia in which to live
- not hold or not have held an FHSA previously.
There will be no prescribed minimum initial or annual contribution, but providers may set their own limits.
Some of the rules will include:
- generally holding the account over at least 4 financial years
- once the account balance reaches $75,000 (indexed), no further contributions will be able to be made
- withdrawals will generally only be allowed where contributions of at least $1,000 have been made in each of at least 4 financial years.
The benefits will include the following:
- contributions can be made by the account holder or any other person
- all contributions will be treated as post-tax amounts and will not be taxed in the account
- account earnings will be taxed at a statutory rate of 15% (rather than the individual’s marginal tax rate) — consistent with the regime applying to superannuation funds
- contributions up to $5,000 p.a will be eligible for a Government contribution into the account, provided that the person is an Australian resident for taxation purposes. The Government will contribute 17% of the first $5,000 (indexed) of contributions made each year (i.e., $850 if $5,000 or more is contributed).
- amounts withdrawn from an account to purchase a first home (subject to meeting the relevant rules) will be tax-free.
Further details will be provided once the legislation has been introduced into Parliament.
2. REMOVAL OF SAME SEX DISCRIMINATION
Changes will be made to a wide range of Commonwealth laws, including superannuation, tax and social security to remove discrimination against couples in a same sex relationship. Some of the changes will be phased-in, but all of the changes are expected to be in place by mid 2009.
Impact
In terms of superannuation, changes would be expected to impact contributions splitting, spouse contributions, and possibly the anti-detriment provisions which have the effect of increasing the amount of a lump sum death benefit.
3. SUPER CLEARING HOUSE
The Government has announced it will provide funding to set up a superannuation clearing house facility to receive employers’ superannuation contributions, from 1 July 2009. The clearing house will enable employers to pay all their employees’ super contributions to a single location. The clearing house facility will then forward the contributions to the superannuation fund selected by the employee. It will not be mandatory for employers to use the clearing house facility. The Government will meet the cost of the facility for businesses with less than 20 employees and will be available on a fee-for-service basis for businesses with more than 20 employees.
An employer’s legal obligation to make superannuation contributions will be met once they have paid the correct amount to the clearing house.
4. PAYMENT OF TEMPORARY RESIDENTS BALANCES TO THE ATO
The Government is proposing that the ATO will identify accounts held by former and current temporary residents and notify the superannuation funds holding these accounts. The funds would then be required to pay the temporary residents’ balances to the ATO. It is proposed that this will occur on an annual basis.
Temporary residents who leave Australia will be able to claim back their balance (less the existing withholding tax) within 5 years of departure. No interest will be paid on amounts held by the ATO.
Temporary residents who become permanent residents will be able to reclaim their balances ‘with interest’ (at a prescribed rate) and the amounts will generally be paid into a superannuation fund.
Employers will still be required to pay SG contributions for temporary residents.
Taxation
1. REDUCTIONS IN PERSONAL INCOME TAX
In line with previous announcements, the Government has confirmed increases in the top three income tax brackets to apply from 1 July 2008 (see table below).
It is then proposed that the 30% income tax bracket will not cut in until income reaches $35,000 from 1 July 2009 and $37,000 from 1 July 2010. In addition, cuts to the personal tax rate will reduce the 40% tax rate to 38% from 1 July 2009 and 37% from 1 July 2010.
The Government has also set an aspirational plan to flatten Australia’s tax system over six years by reducing the number of personal income tax rates from four to three, with a personal income tax scale of 15%, 30% and 40%.
Current and proposed thresholds for the personal income tax rates are shown below:
Tax Thresholds from 1 July 2007
| ||
Low threshold |
High threshold |
Tax Rate % |
- |
6,000 |
- |
6,001 |
30,000 |
15 |
30,001 |
75,000 |
30 |
75,001 |
150,000 |
40 |
150,001 |
45 |
Tax Thresholds from 1 July 2008 (2008 Budget)
|
||
Low threshold |
High threshold |
Tax Rate % |
- |
6,000 |
- |
6,001 |
34,000 |
15 |
34,001 |
80,000 |
30 |
80,001 |
180,000 |
40 |
180,001 |
45 |
|
Tax Thresholds from 1 July 2009 (2008 Budget)
|
||
Low threshold |
High threshold |
Tax Rate % |
- |
6,000 |
- |
6,001 |
35,000 |
15 |
35,001 |
80,000 |
30 |
80,001 |
180,000 |
38 |
180,001 |
45 |
|
Tax Thresholds from 1 July 2010 (2008 Budget)
|
||
Low threshold |
High threshold |
Tax Rate % |
- |
6,000 |
- |
6,001 |
37,000 |
15 |
35,001 |
80,000 |
30 |
80,001 |
180,000 |
37 |
180,001 |
45 |
|
These rates apply to individuals who are residents of Australia for taxation purposes for the whole
financial year. The rates above do not include Medicare Levy of 1.5%.
The Low Income Tax Offset (LITO) has also been increased from $750 to $1,200 from 1 July 2008, phasing out after $30,000 by 0.04 cents in the dollar to a maximum of $60,000. Further increases in the LITO will apply from 1 July 2009 and 1 July 2010.
Current and proposed LITO and effective tax free thresholds are shown below:
LITO |
2007/08 $750 |
2008/09 $1,200 |
2009/10 $1,350 |
2010/11 $1,500 |
Effective tax free threshold |
$11,000 |
$14,000 |
$15,000 |
$16,000 |
Impact From 1 July 2008:
- Most income earners will receive a higher net income.
- The number of income earners eligible for the Low Income Tax Offset will increase, as the threshold at which the offset begins to phase out has been increased.
- Superannuation will remain attractive despite many income earners paying a lower marginal rate of tax on their income.
- Diverting tax savings to superannuation via salary sacrifice can increase a client’s superannuation balance, without affecting current after tax income. Care should be taken to ensure that the concessional contributions cap is not exceeded (for 2007108 this is $50,000 or $100,000 for individuals aged 50 or over and these are not expected to increase in 2008/09). For clients on lower marginal tax rates, using these tax savings to make personal after-tax contributions together with the Government co-contribution may give a better result.
2. REDUCTIONS IN PERSONAL INCOME TAX – SENIOR AUSTRALIANS
The proposed reductions in personal income tax result in a lift to the amount of income that a Senior Australian Tax Offset (SATO) recipient can receive without paying tax. The Medicare Levy threshold that applies to Senior Australians will also increase to ensure that SATO recipients do not pay the Medicare Levy until they begin to incur an income tax liability.
Proposed effective tax free thresholds for SATO recipients:
Single |
2007/08 $25,867 |
2008/09 $28,867 |
2009/10 $29,867 |
2010/11 $30,685 |
Couple |
$43,360 |
$49,360 |
$51,360 |
$53,360 |
Impact
In addition to receiving tax free income from retirement income streams, individuals aged 60 and over will be able to receive higher levels of income outside super before being subject to tax.
3. INCREASE IN MEDICARE LEVY SURCHARGE THRESHOLDS
Individuals and families on taxable incomes above the Medicare levy surcharge thresholds, who do not have private patient hospital cover, generally have to pay the Medicare levy surcharge of 1.0% on their taxable income. These thresholds have not changed since their introduction on 1 July 1997. The Government has announced it will increase these thresholds to the following levels effective 1 July 2008:
Singles threshold |
1997/98 to 2007/08 $50,000 |
2008/09 $100,000 |
Families threshold |
$100,000 |
$150,000 |
4. BABY BONUS TO BE MEANS-TESTED
The Government has confirmed that the Baby Bonus will increase to $5,000 on 1 July 2008.
From 1 January 2009 the Government will make four changes to the Baby Bonus scheme. It will:
- limit eligibility to families with an adjusted taxable income of $75,000 or less in the six months after the birth of a baby (equivalent to an annual income of $150,000)
- only pay the Baby Bonus in 13 fortnightly instalments from the date of claim, rather than as a lump sum
- change the indexation of the Baby Bonus to an annual process each 1 July
- extend the Baby Bonus to families with newly adopted children aged from two years to 16 years
5. CHANGES TO THE FAMILY TAX BENEFIT PART B
From 1 July 2008, the Government will limit eligibility for Family Tax Benefit Part B so that it will only be available to families where the principle earner has an Adjusted Taxable Income of $150,000 or less per year.
Adjusted Taxable Income is defined as the sum of taxable income, the value of any adjusted fringe benefits, target foreign income, net rental property losses, tax free pensions or benefits less 100% of the individuals deductible child maintenance expenditure. From 1 July 2009, it is proposed that Adjusted Taxable Income will change.
6. INCREASE TO LUXURY CAR TAX
Luxury car tax is payable on the sale of a vehicle above the luxury car tax threshold. For the 2007/2008 tax year the luxury car tax threshold is $57,123 (GST inclusive) and the rate is 24% on the amount above the threshold.
Effective 1 July 2008, the Government will raise the luxury car tax rate from 24% to 33% with no change to the threshold of $57,123.
7. TIGHTENING UP FRINGE BENEFIT TAX EXEMPTIONS
The Government has announced it will tighten up FBT exemptions for certain work-related items (including laptops and personal digital assistants (PDAs)) to ensure consistency with the rules applying to mobile phones, computer software and protective clothing. For PDAs and laptops purchased after 7.30pm on 13 May 2008, the FBT exemption will generally be limited to one item of each type per employee per year, and only where these items are used primarily for work purposes.
The Government has also stated it will deny employees tax deductions for FBT exempt items (that is, items purchased primarily for work purposes) from the time of the Budget delivery last night. For items purchased before that time, the deduction will be allowed for the 2007/08 and prior years, but will be denied from 2008/09 and later years. This measure is designed to prevent employees from claiming a double benefit by obtaining an FBT exempt item (such as a laptop) from their pre-tax income and then claiming a deduction for depreciation as well.
8. CHILD CARE TAX REBATE INCREASED
The Government will increase the Child Care Tax Rebate for out-of-pocket child care expenses from 30% to 50%. As part of this measure the maximum out-of-pocket expenses claimable will increase from $4,354 to $7,500 per child per year. In addition, the Child Care Tax Rebate will be paid quarterly, instead of annually.
These changes will be effective from 1 July 2008
9. NEW EDUCATION TAX REFUND
The Government will introduce a 50% Education tax refund on eligible educational expenses from 1 July 2008. Eligible families can claim up to $750 for each child undertaking primary school studies (i.e. a refund of up to $375 per child per year) and $1,500 for each child undertaking secondary school studies (i.e. a refund of up to $750 per child per year).
These amounts will be indexed annually from 1 July 2009.
10. DEPENDENCY TAX OFFSET MEANS TESTED
Eligibility to claim the Dependent Spouse, Housekeeper, Child Housekeeper, Invalid Relative and Parent/Parent-in-law tax offsets will be income tested from 1 July 2008. From this date an income threshold of $150,000 will apply to the claimant.
11. FAMILY TRUST CHANGES
A number of mainly technical changes were made to the Family Trust election system by the previous Government through Tax Laws Amendment (2007 Measures No.4) Act 2007.
The Rudd Government has undertaken to reverse two of the family trust measures introduced in this Act in 2007. These changes include:
- The definition of family in the family trust election rules will limit lineal descendants to children or grandchildren of the test individual or of the test individual’s spouse. This will have effect from 1 July 2008.
- Family trusts will be prevented from making a once off variation to the test individual specified in a family trust election (other than in relation to marriage breakdown). This will have effect from the 2007/08 financial year.
Further, the Rudd Government has given an undertaking to retain the other technical improvements introduced in the 2007 Act.
12. CAPITAL PROTECTED BORROWINGS (CPB)
The rules dealing with the taxation of capital protected borrowings are to be amended by adjusting the benchmark interest rate that applies to CPBs to increase the capital component of the overall interest expense.
The benchmark interest rate in the capital protected borrowing rules will be changed to the Reserve Bank of Australia’s indicator variable rate for standard housing loans. Any interest expense on a CPB in excess of this level will be treated as the cost of capital protection and therefore not deductible. The cost of capital protection will continue to form part of the cost base of the put option.
This amendment will apply to all capital protected borrowing arrangements entered into after 730pm (AEST) on 13 May 2008.
The current law which applies the RBA’s indicator variable rate for personal unsecured loans to determine the cost of capital protection will continue to apply to existing CPB arrangements [or a period of 5 years or the life of the product (if shorter).
This change, therefore, significantly reduces the potential deduction for borrowing expenses, attributing a much higher proportion of the ongoing cost of the borrowing to capital protection. For comparative purposes, the indicator variable rate for personal unsecured loans in currently 14.55%, while the indicator rate for a variable home loan from a bank is 9.35%
13. CGT SMALL BUSINESS CONCESSIONS
The Government has confirmed it will implement a measure announced but not legislated by the previous government, to the small business CGT concessions by allowing:
- taxpayer owning an asset used in a business by an affiliate or related entity; and
- a partner who owns an asset used in the partnership business; to access the small business CGT concessions.
Social Security
1. DEFINITION OF INCOME FOR INCOME
TESTED BENEFITS TO INCLUDE SALARY SACRIFICE
With effect from 1 July 2009, income tests used to determine a range of government financial assistance programs (such as income support payments, the Government co-contribution, family assistance payments, tax offsets, Commonwealth Seniors Health Care Card, child support, and other financial and retirement savings assistance delivered through the tax system) will be tightened to include non-wage remuneration, such as salary sacrificed contributions to superannuation. Individuals who have access to salary sacrifice to reduce taxable income will be treated on an equivalent basis to those who do not nave access to salary sacrifice arrangements.
Further changes will include reportable fringe benefits being assessed as income (where they are not already included) and net financial investment losses being added back in to income.
2. BONUS PAYMENT FOR SENIORS
A bonus of $500 will be provided to individuals over age pension age (or service pension age, where qualifying) in receipt of the following payments at 13 May 2008:
- Age pension
- Veterans’ Affairs pensions
- Widow B pension
- Wife pension
- Seniors concession allowance
- Mature age allowance
- Widows allowance
- Partner allowance
To be eligible, an individual must be receiving a qualifying payment, or have made a claim for a payment, on or before 13 May 2008. The individual must also be in Australia or temporarily absent from Australia for not more than 13 weeks.
The bonus will not be taxable nor will it be assessed as income for Social Security or Department of Veterans’ Affairs purposes and will automatically be paid on or prior to 30 June 2008.
3. BONUS PAYMENT FOR CARERS
A bonus will be paid to individuals in receipt of carer payments and allowances. Recipients of carer payments and Department of Veterans’ Affairs carer service pension will receive a bonus of $1,000. Recipients of carer allowance will receive $600 for each eligible person in their care.
To be eligible, an individual must be receiving the qualifying payment on 13 May 2008. Individuals receiving both payments will receive both lump sum amounts.
The bonus will not be taxable nor will it be assessed as income for Social Security or Department of Veterans’ Affairs purposes and will automatically be paid on or prior to 30 June 2008.
4. COMMONWEALTH SENIORS HEALTH CARD
The Commonwealth Seniors health card will be subject to new compliance checks and the income test will be changed. Compliance checks, including data matching and eligibility reviews, will be progressively rolled out from 1 July 2008.
Changes to income testing for the cards will apply from 1 July 2009, with the following being included as income:
- Income from superannuation income streams from a taxed source
- Salary that is sacrificed to superannuation
5. ELIGIBILITY FOR CONCESSION CARDS TEMPORARY ABSENCES
Australian Government concession cards will now remain valid during short-term overseas travel from 1 July 2008. From this date, concession cards will no longer be cancelled when card holders leave Australia for holidays or other short term absences.
This measure applies to holders of the following cards:
- Pensioner concession card
- Health care card
- Commonwealth Seniors health card
Under the current regulations, concession cards cannot be retained while the holder is overseas. Cards are cancelled from the date the holder leaves Australia and have to be renewed upon return.
6. INDEXATION OF AGE PENSION
New indexation arrangements will be introduced for the age and service pensions. Under the arrangements announced, these pensions will be indexed to the highest of the following:
- Consumer price indexation
- Male total average weekly earnings benchmark
- Living cost index for age pensioner households
Disclaimer
This document is to be used as general information only and should not be considered a comprehensive statement on any matter and should not be relied upon as such. This document has been prepared without taking into account any individual objectives, financial situation or needs.
No member of Thornton Group, nor any of their employees or directors gives any warranty of accuracy or reliability nor accepts any liability in any other way, including by reason of negligence for any errors or omissions contained herein, to the extent permitted by law.
This document may not be used or reproduced without the prior consent of the Thornton Group.