Greetings!
Welcome to a special 'BUDGET 2010' issue of 'MMTalk'. There are not too many surprises in this year's Federal Budget with Wayne Swan delivering what he described as a 'no frills responsible' budget.
So here is my no frills update to you about what the budget contains and what the implications maybe to you.
Overall if the expectations play out the economy will remain in good shape and Australia will be out of debt by 2013, as long as China continues to grow.
Other expectations and stats from the budget are that unemployment is expected to fall below 5% and inflation is going to track at 2.5% which if achieved is good news for those with a mortgage.
This level of inflation is the lower level of what the Reserve Bank looks for when making interest rate decisions so if achieved rates should remain on hold, but only time will really tell that story.
Check out the official Budget 2010-11 homepage here
me nd response from the Government was |
Taxation Changes
50% savings discount for interest income from 1 July 2011
The Government plans to provide a 50% tax discount on up to $1,000 of interest earned by individuals, including interest earned on deposits held in banks, from bonds, debentures and annuities.
Currently there are relatively higher levels of taxation applying to interest income, compared to other forms of investment income. The discount will be available for interest income earned directly as well as indirectly, such as via a trust or managed investment scheme, and is expected to benefit around 5.7 million taxpayers in 2011-12.
There will be a flow-on effect for taxpayers claiming the discount for interest income as they will have a reduced adjusted taxable income. The Government will consult during 2010-11 on details concerning the operation of the discount, including in relation to the scope of the discount and the mechanism for applying the discount to interest earned indirectly by individuals.
To generate $1,000 of interest you would need savings of $16,667 assuming a 6% interest rate so this may not benefit all!
Personal Tax Rate Reduction
These reductions in personal income tax have been previously legislated by the Rudd government. The changes include an increase in the amount of income you can earn before moving into the 30% tax bracket. In addition the 38% tax rate is decreasing to 37%.
These new tax rates are shown against the current rates below:
These changes represent a $150 reduction in tax for those on a lower income and $1,300 for those above $180,000.
As with all tax changes this may have an impact on those people using salary sacrifice strategies.
Standard Deduction for Work-Related Expenses and Tax Accounting Costs
The Government proposes to allow a standard deduction of $500 for work-related expenses and the cost of managing tax affairs from 1 July 2012. From 1 July 2013 the standard deduction will increase to $1,000.
Those with deductible expenses greater than the standard deduction amount will still be able to claim their higher expenses in the usual way.
This will be a great option for those who are employed on a salary with little to claim. Those with investments are likely to continue to claim actual expenses.
Child Care Rebate - return the annual cap of $7,500 and pause indexation
Currently
the annual Child Care Rebate (CCR) is capped at $7,778 per child and is
indexed each year. The Government will reduce the maximum CCR
claimable per child to $7,500 and pause indexing for four years from 1
July 2010.
Other Tax Measures
| - Increase in the net medical expense tax offset claim threshold from $1,500 to $2,000 - Effective 1 July 2010;
- Reduction in Personal Income Tax for Senior Australians from increase to Senior Australian Tax Offset (SATO);
- Lowering the company tax rate with an early start for small business. The
company tax rate will be reduced from 30% to 29% from 1 July 2013 and
to 28% from 1 July 2014. There will
be an earlier start for eligible
small business with a reduction in the company tax rate to 28% from 1
July 2012. This means that small business companies will have a lower
tax rate than other companies until 1 July 2014 The change is
expected to make Australia's company tax rate more competitive relative
to other similar sized OECD countries and make Australia a more
attractive destination for foreign investment.
- Small business instant write off effective 1 July 2012, this proposal
will allow small businesses to immediately write off assets valued at
under $5,000 (up from $1,000) currently and to write off all other
assets (except buildings) in a single depreciation pool at a rate of
30%.
Currently, small businesses allocate assets to two different
depreciation pools.
- Resource super profits tax. A Resource Super Profits Tax (RSPT) will
be introduced on 1 July 2012 at a rate of 40% on profits made from the exploitation
of Australia's non renewable resources. The RSPT is a key part of the
Government's reform agenda as the delivery of the other measures such
as lowering company tax rates and the various superannuation measures
are contingent on the implementation this measure.
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Superannuation
Permanent reduction to the superannuation co-contribution
The rate for the superannuation co-contribution will be permanently retained at 100% of a person's eligible personal non-concessional superannuation contributions up to a maximum contribution of $1,000.
The Government will also freeze the indexation applied on the income threshold above which the maximum superannuation co-contribution begins to phase down for 2010/11 and 2011/12. This means that the thresholds will be frozen at $31,920 and $61,920 for the next two years.
This is not great news for lower to medium income earners. The co-contribution matching rate was set to increase to 125% for 2012/13 and 2013/14, with a maximum co-contribution of $1,250.
From 2014/15, it was to return to the previous matching rate of 150%, with a maximum co-contribution of $1,500.
Government super contributions tax rebate for low income earners
The Government will make a super contribution of up to 15% of the concessional contributions made by or for individuals on adjusted taxable incomes (ATI) of up to $37,000 (not indexed), subject to a maximum limit of $500 (not indexed). This will apply from 1 July 2012 and paid into the person's super account in the 2013/14 financial year.
This means that clients with ATI's of $37,000 or less, in effect, will not pay contributions tax on concessional contributions. Take for example a client on ATI of $35,000. The 9% SG payable on this amount is $3,150 and will currently result in a net contribution of $2,677.50 in the super fund. Under this measure, the super fund would receive a Government contribution of $472.50 in the following financial year increasing the contribution amount to $3,150.
The Government will consult on details of the changes.
This measure may encourage some people on lower incomes to salary sacrifice more to super to take advantage of the maximum limit.
Self employed people that meet the 10% test and those not working but who have investment income, may also take advantage of the measure by making concessional contributions if their Adjusted Taxable Income is less than $37,000.
Deductibility to funds of cost of providing terminal medical condition benefits
The range of benefits that are deductible by complying super funds and retirement savings account providers will be extended to include terminal medical conditions benefits. This has retrospective effect from 16 February 2008, the date the Terminal Medical Conditions condition of release was introduced into the super legislation.
This will bring Terminal Medical Condition benefits in line with those applying to death, permanent and temporary incapacity benefits.
Concessional contributions (CC) cap increase
The Concessional Contributions (contributions you get a tax benefit from) for those aged 50 or more was set to reduce to $25,000 from 1 July 2012.
This retains the higher limit of $50,000 (indexed) permanently, but only for those who have total super balances of under $500,000.
This will greatly assist those people employing salary sacrifice and transition to retirement strategies at a time when they are better placed to contribute more to super. Great care will need to be taken for people with
balances close to $500,000 and contribution splitting strategies may assist here.
There will be several factors to consider during the consultation period including what date the $500,000 threshold applies and how to value defined benefit interests
Other super changes
- Allowing the Commissioner of Taxation to exercise discretion for the purposes of excess contributions tax before an assessment is issued;
- Clarifying the due date for the shortfall interest charge for purpose of excess contributions tax;
- Increasing the time limit for deductible employer contributions made for former employees;
- Permanently allowing a claim for a deduction for eligible contributions to be made to successor super funds;
- Providing new arrangements for public sector defined benefit schemes which fund benefits through last minute contributions.
There is no relief from the current excess contributions tax, the ability for the Commissioner to exercise discretion before an assessment is issued is welcomed as it will provide certainty to clients regarding their assessment at an earlier time.
From the Henry Review - Increasing the superannuation guarantee rate to 12%;
- The Superannuation Guarantee age limit to increase from 70 to 75;
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| Wealth Creation
First Home Savers Account
The Government proposes that savings in an First Home Saver Account (FHSA) can be paid into an approved mortgage after the end of a minimum qualifying period, rather than requiring it to be paid to a superannuation account.
The current rules require that FHSA holders keep their savings in an FHSA for 4 financial years before they are able to use those savings to buy a home. At present if an account holder buys a home before the end of that 4-year period, the balance of their FHSA must be transferred to their superannuation.
The changes will apply for houses purchased after assent of the legislation that will give effect to this measure.
This will allow an earlier access to the savings instead of waiting to meet a condition of release under superannuation rules and the ability to reduce mortgage debt.
Capital Protected Borrowings
| The Government has proposed to increase the benchmark interest rate that applies to capital protected borrowings to the Reserve Bank of Australia (RBA) indicator rate for standard variable housing loans plus 100 basis points (or 1% for those who don't talk basis points).
Prior to this announcement the benchmark interest rate was set at the RBA indicator rate for standard variable housing loans.
The Government has confirmed that this measure will apply to capital protected borrowings entered into from 7:30 pm (AEST) 13 May 2008.
Increasing the benchmark interest rate by 100 basis points will allow existing borrowers to claim a larger proportion of the expenses on the borrowings as a deduction.
Income Tax Treatment of Instalment Warrants
The Government seeks to provide certainty for investors in qualifying instalment warrants by treating them as the owner of the underlying asset for income tax purposes, with effect from 1 July 2007.
This measure will also ensure that the opportunity for non-recourse borrowing by trustees of superannuation funds permitted under prudential regulations is not undermined by its tax treatment.
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| Social Security
Paid Parental Leave - Implementation
| In last years Federal Budget, the Government announced its Paid Parental Leave scheme which provides 18 weeks of leave at the level of the national minimum wage to eligible new mothers from 1 January 2011.
The Government will provide funding ($21.2 million over five years) for the implementation of the scheme. The measure aims to ensure employers and employees can access their rights, gain their entitlements and meet their responsibilities under the scheme.
Special Disability Trusts - greater accessibility
Special Disability Trusts enable parents and immediate family members to put money aside for the future care and accommodation costs of a family member with a severe disability. Furthermore, up to $551,750 (indexed annually) and the family home can be kept in the trust without being counted under pension income or assets tests for the beneficiary of the trust.
The Government will expand the definition of a beneficiary to include people with a disability who can work up to seven hours per week. In addition, this measure will amend the allowable uses for the trust to include all medical expenses, including membership costs of private health funds, maintenance expenses of Special Disability Trust property and discretionary spending of up of $10,000 per year.
War Widow/er pension - claimants who enter a de facto relationship
There is an anomaly which currently exists which allows widow/ers who have entered into a de facto relationship following the death of the veteran partner to claim War Widow/ers Pension entitlements, while those who have since married cannot.
The Government will remove eligibility for the War Widow/ers Pension for people who, before applying, enter a de facto relationship following the death of their veteran partner. By removing this inconsistency, neither war widow/ers who enter a de facto relationship nor those who marry following the death of their veteran spouse, before applying for the pension, will be eligible.
War widow/ers who remarry or enter a de facto relationship after claiming a war widow/ers pension will not lose their entitlement under this measure.
Aged Care - protecting accommodation bonds
There were a number of Aged Care measures, however they were applicable to the Aged Care providers, and therefore not relevant to this report. One item of interest to financial planners, however, was that the Government will enhance the protection of accommodation bonds held by aged care providers by applying more stringent requirements on how
accommodation bonds can be invested. In addition, criminal penalties for the misuse of the bonds will be introduced.
Reporting requirements in relation to how bonds are used will also be strengthened. The Government will consult with consumers and industry with a view to putting the new arrangements in place by 1 July 2011.
The Government recently asked the Productivity Commission to undertake a public inquiry into Australia's aged care system to develop detailed options for further structured reform. The release of the draft report is not expected until December 2010 with a final report due in April 2011.
Job Capacity Assessment - assessments for Disability Support Pension (DSP) and employment services
From 1 July 2010, job seekers who seek a temporary exemption from participation requirements due to a medical condition will have the exemption determined by Centrelink staff rather than a Job Capacity Assessment.
From 1 July 2011, job seekers who need to have their work capacity assessed will undergo a revised assessment of their need for employment services, which will be conducted by an allied health professional.
From 1 January 2012, DSP claimants without sufficient evidence of a future work capacity of less than 15 hours per week may be referred to an alternative income support payment and offered employment assistance through Job Services Australia or Disability Employment Services.
Productive Ageing Package
Announced on 1 February 2010, the Government will provide funding of $43.2 million over five years to help mature age Australians remain engaged in the labour market. The measure includes initiatives to support mature age workers in select industries and locations to retrain and move to a new career, or to undertake appropriate training to transition to a supervisory or training role.
A consultative forum will be established to provide advice to the Government on initiatives that could lead to the higher participation of mature age workers in employment.
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Money Mechanics are specialist financial life planners in the areas of self managed super funds, public sector superannuation, wealth creation, salary sacrifice, gearing strategies, estate and risk management planning.
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No matter what your goals for life, seek advice and empower yourself to create wealth through understanding,
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 | | Quote of the Month
| "This is a no frills responsible budget"
Wayne Swan
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