With the release of the 2014 Federal Budget, we have highlighted the areas of most relevance to our clients. Specially, we are concentrating on Tax and Investment changes that you should be aware of. We note that some of these changes may not apply to you. However, we also recognise the importance of keeping up with news on these matters and would encourage you to read on.
These included the introduction of a Temporary Budget Repair Levy on high income earners and an increase in the pension age to 70. However, the Budget also included a number of other significant savings measures which could impact a range of people across all income levels. These include:
- indexing the age pension to CPI
- changing eligibility to the Commonwealth Seniors Health Card
- tightening eligibility to family tax benefit payments
- abolishing a number of tax offsets, and
- pausing indexation of a number of payments and programs, including the Medicare Levy Surcharge and Private Health Insurance Rebate.
In addition, the Government also announced a number of important changes to superannuation, including changing the schedule for increasing the superannuation guarantee to 12% and allowing people to withdraw any excess non-concessional contributions made after 1 July 2013.
It is important to note the Budget announcements are still only proposed at this stage and that, to be legislated under the new Senate, the Government will need the support of six of the record 18 crossbench Senators.
Temporary Budget Repair Levy
Applies from 1 Jluy 2014 to 30 June 2017
A levy of 2% will apply to an individual’s taxable income over $180,000 per annum for three years from 1 July 2014. In addition, the rate of Fringe Benefits Tax (FBT) will also increase to 49% to prevent high income earners from using fringe benefits to avoid the levy. The increase in the FBT rate will be from 1 April 2015 to 31 March 2017 to align with the FBT year.
A range of other tax rates that align with the top marginal rate are also expected to increase.
The levy amount expected to be paid by taxpayers with taxable income over $180,000 is summarised in the following table.
|Home owners||Non home owners|
As the Temporary Budget Repair Levy is proposed to apply to taxable income, strategies which reduce taxable income will result in a reduction in the amount of levy payable. This can be achieved by either reducing assessable income or increasing deductible expenditure.
It is also important to note that while the Temporary Budget Repair Levy is proposed to apply to high income earners, it could also potentially apply to people with income below $180,000 where they:
- sell an asset and realise capital gains, or
- take a superannuation lump sum benefit consisting of taxable component between the age of 55 and 59, as this amount will be included in the taxpayer’s taxable income and could push the client over the $180,000 threshold.
Taxpayers considering selling assets or taking superannuation lump sums between 1 July 2014 and 30 June 2017 may therefore need to take into account any additional levy they may incur as a result.
Option to withdraw excess non-concessional contributions from superannuation
1 July 2013
The Government has proposed that individuals will have the option to withdraw contributions made from 1 July 2013 that exceed their non-concessional contributions cap.
Under this measure, associated earnings are also able to be withdrawn and taxed at the individual’s marginal tax rate. Final details of the policy will be settled following consultation with key stakeholders in the superannuation industry.
It is understood that individuals who do not withdraw their excess non concessional contributions will be subject to excess contribution tax at the top marginal tax rate on the amount of the excess.
This proposal is good news as it will mean that clients who inadvertently excess their non-concessional cap will be able to access the excess amounts rather than have it taxed at the top marginal rates. This measure also ensures that the treatment of excess non-concessional contributions will be largely consistent with the rules that apply to excess concessional contributions.
Age pension age to increase to 70 by 2035
The Budget confirmed the Treasurer’s earlier announcement that the age pension age will increase to age 70 by the year 2035. This means that those born on or after 1 January 1966 (currently 48 years of age or younger) will have to wait until they are 70 before they are eligible for the age Pension.
While the current pension age for both men and women is 65, it has been legislated that from 1 July 2017, the qualifying age for Age Pension will increase from 65 years to 65½ years for both men and women. The qualifying age will then rise by six months every two years, reaching 67 by 1 July 2023. See table below.
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The changes proposed in the Budget will continue the propose increase in the pension age as follows:
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Whilst the policy intention is to encourage people to continue working until age 70, the reality is many people will be unable to continue working. This means there will likely be a gap between when someone retires and when they qualify for the age pension.
How much additional superannuation will be required to fund this gap? A person who is currently 48 (born 1 January 1966) who wishes to retire at age 65, will require approximately $96,432 to generate the equivalent of the maximum age pension currently $21,912 p.a. (for singles) to fund the five-year gap. For members of a couple, they require approximately $72,689 each to fund the five year gap.
This is a substantial amount to accumulate over the next 16 ½ years. To close this gap, a 48 year old today will need to make additional pre-tax contributions of approx. $5,232 p.a. (for singles) or $3,943 p.a. (for members of a couple) every year for the next 16 ½ years.
Figures are shown in today’s dollars; rate of inflation of 3% p.a. Centrelink rates for the period between 20 March 2014 and 30 June 2014. Pensions are indexed at 3.0% p.a. An account based pension is to be commenced at age 65 with rate of return of 7% p.a. Contributions tax of 15%, rate of return on investment in accumulation phase is 6.0% p.a. net of taxes and fees. Super contributions will increase by 3.5% p.a.
Superannuation guarantee rate to increase to 9.5% – Change to schedule for increase to 12%
From 1 July 2014
The Government has announced that the superannuation guarantee (SG) rate will increase from 9.25% to 9.5% from 1 July 2014, as currently legislated, given the defeat of the Minerals Resource Rent Tax (MRRT) Repeal and Other Measures Bill 2013 in the Senate.
However, the Government proposes to amend the schedule for SG to increase to 12% by freezing the SG rate at 9.5% from 1 July 2014 until 30 June 2018, and subsequently increasing the SG rate every year by 0.5% until it reaches 12% from 1 July 2022.
The table below shows the scheduled increase as currently legislated, as proposed in the defeated MRRT Repeal and Other Measures Bill 2013, and under the new Government proposal.
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This announcement gives employers and employees certainty that the SG rate will increase to 9.5% from 1 July 2014, allowing employers to prepare for the increase to their SG obligations, and giving time for employees’ salary sacrifice arrangements to be amended for the 2014/15 financial year to ensure they remain within their concessional contributions cap.
However, the new proposal represents a further delay to the SG rate reaching 12% by another year compared to the Government’s previous proposal, and represents a delay of 3 years compared to current legislation. Therefore, the new proposal will further reduce the SG entitlements of all employees until the SG rate reaches 12% from 1 July 2022 under the new proposal.
The table below illustrates the reduction in yearly SG entitlements of employees on a range of salaries under the new proposal compared to what they would have received under current legislation.
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Dependent Spouse Tax Offset (DSTO) to be abolished
1 July 2014
The Government will abolish the dependent spouse tax offset for all taxpayers from 1 July 2014. Therefore, the limited access to the DSTO to those whose dependent spouse was born before 1 July 1952 will no longer be available.
Taxpayers that qualified for the Zone Tax Offset, the Overseas Civilians Tax Offset or Overseas Forces Tax Offset and that qualified for the DSTO may instead now qualify for the Dependent (Invalid and Carer) Tax Offset (DICTO) where eligible.
Taxpayers with a dependant who is genuinely unable to work due to a care obligation or a disability may be eligible for the DICTO.
Reminder: Increase in the Medicare Levy from 1 July 2014
As per the 2013 Budget, the Medicare Levy will increase from 1.5% to 2.0% from 1 July 2014 to provide funding for Disability Care Australia. This measure has already been legislated.
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 exemptions from the Medicare Levy will also remain in place, including for blind pensioners and sickness allowance recipients.
Taking into account the new Temporary Budget Repair Levy, the increase in the Medicare Levy will result in an effective tax rate for taxable income over $180,000 of 49% for the period between 1 July 2014 and 30 June 2017.
Paid parental leave to commence
1 July 2015
The government will proceed with the paid parental leave scheme from 1 July 2015. Under the scheme mothers will receive up to 26 weeks of salary up to a cap of $100,000 per annum. This translates into a maximum payment of $50,000 over the 26 week period. Women earning over $100,000 a year will receive paid parental leave but it will be capped at an equivalent of $100,000 per annum. This scheme will be funded via a 1.5% levy on companies earning taxable income over $5 million.
The Information in this 2014 Budget update summary has been sourced from Colonial First State “FirstTech”. The italicised blue words are their interpretation of the changes. This is an update only and is not intended to be used in any other way than as a general update. Do not act on the information included in this update without first seeking specific financial advice from your Financial Planner or other professional qualified to give advice..
Colonial First State note the following:
The information contained in this Budget Briefing is based on the understanding Colonial First State Investments Limited ABN 98 002 348 352 AFS Licence 232468 (Colonial First State) has of the relevant Australian laws and the 2014 Federal Budget announcements as at 13 May 2014. The Briefing should not be taken to indicate if, when or the extent to which, announcements will become law.
While all care has been taken in the preparation of the Briefing (using sources believed to be reliable and accurate), no person, including Colonial First State or any other member of the Commonwealth Bank group of companies, accepts responsibility for any loss suffered by any person arising from reliance on the information. The Briefing has been prepared for the sole use of advisers, is not financial product advice and does not take into account any individual’s objectives, financial situation or needs.
LifeTime Financial Group.
An independently owned Melbourne based Financial Planning Group