2013/14 Federal Budget Update Wrap
Last night the Treasurer handed down the 2013-14 Federal Budget, a deficit of $18bn in 2013-14 due to significant revenue shortfalls (despite growth in overall revenue collections year-on-year). Government spending commitments such as the National Disability Insurance Scheme and the Gonski school reforms have placed considerable pressure on framing the Budget.
Also reduced is the expected growth of the Australian economy, revised down to 2.75% for 2013-14 and 3% for 2014-15.
It appears that the devil is in the detail for any new or continuing assistance packages with most indexation increases deferred for the time being. The good news for small business is that not much has changed.
On the superannuation front we have confirmation of recent announcements that most people are already aware of.
Below we highlight the major changes and announcements in each of the following segments:
- Personal Taxation
- Business Taxation
- Social Security
- Other Measures
- 2015 tax-free threshold increase ‘’deferred’’
The already legislated increase in the tax-free threshold to $19,400 from 1 July 2015 will now be deferred. The deferral of the so-called Clean Energy Future personal tax cuts came about due to
the lower than originally anticipated carbon price after 1 July 2015 [the Government had budgeted on $29 a tonne in 2015-16]. Climate Change Minister Greg Combet said the change was a deferral [and not an abolition] because”when the carbon price rises again in the future, … there will be regular reviews … [and] those tax cuts will still beimplemented at that point in time”. He said the tax-free threshold change would be deferred “until such time as thecarbon price exceeds $25.40 [a tonne], whenever that may be”.
- Increase in Medicare Levy to 2%
Effect from 1 July 2014 the medicare levy will increase by 0.5% to 2% to help fund the proposed National Disability Insurance Scheme (NDIS). This results in the effective top marginal rate becoming 47% from that date.
- Phase-out of medical expense tax offset
Taxpayers who claimed the offset in 2012-13 will be able to claim it in 2013-14 (for all currently-qualifying expenses that meet the requisite threshold). Similarly, taxpayers who claim the offset in 2013-14 will be able to claim it in 2014-15 (again, for all qualifying expenses). However, an offset can only be claimed by such taxpayers from 2015-16 for medical expenses relating to disability aids, attendant care or aged care.
Consequently, taxpayers who do not claim the offset in 2012-13 cannot claim it in 2013-14 or later income years – except if the net medical expenses relate to disability aids, attendant care or aged care. As stated above, the offset for these expenses may only be claimed until 2018-19.
- Medicare Levy low-income threshold for families increased.
The Budget announced that the Medicare levy low-income threshold for families will increase to $33,693 for the 2012-13 income year, with effect from 1 July 2012. The additional amount of threshold for each dependent child or student will also increase to $3,094.
- Self- Education expenses to be capped
The Budget confirmed the 13 April 2013 announcement that a $2,000 cap on tax deductions for work-related self-education expenses would be capped from 1 July 2014.
- Extension of monthly PAYG Instalment system.
The requirement to make monthly PAYG Income Tax Instalments will be extended to include trusts, superannuation fund, sole traders and large investors.
We don’t see this measure having any severe impact on small business as companies will have to have a turnover of at least $20m to be brought into the monthly reporting and payments system from January 2016. All other entities with a turnover exceeding $20m will be brought into the system from 1 January 2017.
- Funding for ATO compliance activities
$77.8m over 4 years will be provided to the ATO to improve compliance and data matching initiatives with third parties
$67.9m over 4 years to ATO to undertake compliance activities in relation to trust structures.
$80.2m in extra funding to strengthen upfront checks for issuing ABNs and encourage the use of AUSkey.
Confirmation of recent announcements of further superannuation reforms including:
- Tax-free pension earnings capped at $100,000 from 1 July 2014.
- Transitional arrangements for capital gains on assets purchased before 1 July 2014.
The installation of a $100,000 threshold above which a 15% tax rate will apply to earnings on superannuation fund assets supporting current pensions will require trustees to review the fund’s investment strategy ahead of the 1 July 2014 start date. Despite the CGT transitional rules, the $100,000 threshold will require SMSFs with “lumpy” assets (such as business real property, or other commercial and residential property) to undertake more careful planning for when substantial capital gains above $100,000 per member crystallise in one particular income year. Trustees currently looking to undertake significant investments in real property may also need to consider appropriate investment structures (such as a unit trust) which could enable the asset to eventually be sold gradually over several income years to stay under the $100,000 annual threshold. This would also be a consideration when real property acquired under a limited recourse borrowing arrangement is ultimately transferred from the holding trust back to the SMSF when the loan is repaid. The transitional rules for CGT assets suggest that a valuation will be required for all superannuation fund assets at 1 July 2014.
- Higher concessional contributions cap
Proposed increase to the concessional contributions cap as follows
- $35,000 for people aged 60 or over from 1 July 2013
- $35,000 for people aged 50 or over from 1 July 2014
Withdrawal of excess concessional contributions
Legislation to be introduced to allow individual to withdraw any excess concessional contributions made into their fund from 1 July 2013. These contributions would then be taxed at the individual’s marginal tax rate (plus an interest charge)
Taxpayers on the top marginal tax rate may have a slightly higher tax liability (due to the additional interest charge) if they choose to withdraw any excess concessional contributions which would be taxed at the top marginal rate in their hands in any event. As such, taxpayers on the top marginal tax rate may be better served by leaving the excess contributions in their superannuation fund and simply paying the excess concessional contributions tax of 31.5% (on top of the 15% contributions tax paid by the superannuation fund). The taxpayer can still use a release authority to withdraw an amount from her or his fund to pay the ECT liability.
However, a taxpayer on the top marginal tax rate should consider withdrawing any excess concessional contributions which would otherwise automatically flow through and trigger a breach of the $450,000 bring forward rule for any non-concessional contributions. In this situation, the proposed withdrawal option may help to prevent a severe ECT penalty with an effective tax rate of up to 93%.
- Baby Bonus to be abolished and replaced from 1 March 2014.
Family Tax Benefit Part A payments will increase by $2,000 to be paid in the year following the birth or adoption of a first child and $1,000 for a second or subsequent child. The additional FTB Part A would be paid as an initial payment of $500 with the remainder paid over seven fortnightly instalments.
Parents paid under the Paid Parental Leave (‘PPL’) will not be eligible for the additional FTB Part A. They will however be able to count time on Government PPL towards the work test period for a subsequent child.
- Indexation paused on upper income limits for family payments
The higher income thresholds for family payments and supplements will remain unchanged for a further 3 years. This maintains the current upper income test limit of $150,000 for FTB Part B, dependency tax offsets, PPL and Dad and Partner Pay. The upper income free area for FTB Part A will remain at $94,316 plus an additional $3,796 for each child after the first.
Other changes include:
- Planned FTB Part A increase scrapped.
- FTB Part A will only be paid until the end of a calender year a child completes school where 16 years and over. To commence form 1 January 2014.
- Income free area increased from $62 per fortnight to $100 per fortnight.
- Means test exemption for seniors downsizing from family home.
- The proposed measures will seek to remove the disincentive for pensioners to move to more age-appropriate housing . The family home must have been owned for a least 25 years with at least 80% of proceeds from the sale (up to $200,000) to be deposited into a special account. These funds plust earned interest will be exempt from pension means testing for up to 10 years provided there are no withdrawals during the life of the account. The pilot will commence on 1 July 2014.
- Child Care Rebate indexation pause continued
- Indexation on the annual cap on the Child Care Rebate CCR will be paused for a further 3 years remaining at $7,500 a year until 30 June 2017.
- Farm Management Deposits non-primary production threshold increased from $65,000 to $100,000 from 1 July 2014.
- HELP discount to be abolished:
- Removal of the 10% discount to upfront fee paying students and 5% discount on voluntary payments made to the ATO of $500 or more;
- Removal will take effect for payments from 1 January 2014.