Major changes include

• Super contributions cap increased
• Super tax for high earners increased
• Baby Bonus abolished
• Income tax cuts on hold
• Medicare levy increased
• Childcare rebate frozen

Superannuation

The budget essentially confirmed previous superannuation announcements and in some areas provided additional clarification. The key measures previously announced include:

Concessional contributions cap increased to $35,000 

As previously announced, the Government will increase the concessional contributions cap to $35,000 (unindexed) as follows:

• For the 2013/14 financial year, the higher cap of $35,000 will apply if you are 59 years or over on 30 June 2013. For everyone else the general cap of $25,000 applies; and
• For each financial year from 2014/15 onwards, the higher $35,000 cap will apply if you are 49 years or over on 30 June of the previous financial year.

The higher concessional contribution cap will apply until the general concessional contribution cap reaches $35,000 due to indexation (expected to occur from 1 July 2018). That is, the higher cap will only be temporary.

The current $150,000 limit, or the option of the 3 year “bring forward” rules for non-concessional contributions remain completely unchanged.

Excess concessional contributions taxed at marginal rates

If you make excess concessional contributions, they will be taxed at your marginal tax rate, plus an interest charge to recognise that the tax on excess contributions is collected later than normal income tax.

You’ll also have the option of deciding whether you want to withdraw your excess concessional contributions from your superannuation fund.

These reforms will apply to all excess concessional contributions made from 1 July 2013.

Under the current arrangements, concessional contributions in excess of the annual cap are taxed at the top marginal tax rate regardless of your personal marginal tax rate. In addition, you can only withdraw excess concessional contributions the first time you make an excess contribution after 1 July 2011, and only up to a maximum amount of $10,000.

Pension earnings over $100,000 to be taxed at 15%

From 1 July 2014 the amount of exempt current pension income available to superannuation funds will be limited to $100,000 a year for each individual.

Fund earnings, derived from pension assets, above this limit will be taxed at the 15 per cent rate that applies to earnings in the accumulation phase.

This proposed $100,000 limit will be indexed to the Consumer Price Index (CPI), and will increase in $10,000 increments.

Currently, when a superannuation fund makes a capital gain on assets in the pension phase, the capital gain amount is also treated as exempt current pension income (and therefore exempted from tax). However, a capital gains tax event is only triggered in the year that the fund disposes of the asset.

As such, special arrangements will apply when assessing capital gains on assets purchased by a fund before 1 July 2014:

• For assets that were purchased before 5 April 2013, a full tax exemption will continue to apply to capital gains that accrue before 1 July 2024;
• For assets that are purchased from 5 April 2013 to 30 June 2014, you will have the choice of including in the $100,000 limit the capital gain, or only that part that accrues after 1 July 2014; and
• For assets that are purchased from 1 July 2014, the capital gain will be included in the $100,000 limit.

When assessing capital gains that are subject to this tax, a 33 per cent discount will apply (where applicable), to effectively tax the gain at a rate of 10 per cent.

It is important to note that this reform will not affect the tax treatment of withdrawals (both lump sums and pensions) made from a superannuation fund. Withdrawals will continue to remain tax-free if you’re 60 or over, and be subject to the existing tax rates if you’re under 60.

The Government will also ensure that members of defined benefit funds, including federal politicians, are impacted by this new reform in the same way as members of defined contribution funds (i.e. that there will be a corresponding decrease in concessions in the retirement phase).

Contributions tax doubling to 30% if you earn over $300,000 

In the May 2012 Federal Budget the Government announced a proposal to apply an additional 15% tax to concessional contributions made from 1 July 2012 if your combined annual income and concessional contributions are greater than $300,000. Since then, draft legislation has also been released.

The key details of this measure are summarised below:

• If you exceed the combined $300,000 annual threshold, you will generally have to pay an additional 15% tax on your concessional contributions.The additional 15% tax will not apply to any concessional contributions that are in excess of the concessional contributions cap, or to any excess concessional contributions on which you accept an offer from the ATO to have them refunded and taxed as income.

• The definition of income for the combined $300,000 threshold is a modified version of the income definition used for Medicare Levy surcharge purposes. The modified definition is broadly:Taxable income PLUS concessional contributions (within the concessional contributions cap) PLUS reportable fringe benefits PLUS total net investment losses.Any taxable component of a superannuation withdrawal that is within the low rate cap amount ($175,000 for 2012/13) is excluded from taxable income when calculating the threshold.Excess concessional contributions will generally not count towards the combined $300,000 threshold.

• If your income before including your concessional contributions is less than $300,000 but the inclusion of the concessional contributions pushes them over, then only that part of the contributions in excess of the $300,000 threshold will be subject to the additional tax.

Example

Jack’s income, as defined above, before including his concessional contributions is $285,000. After adding his concessional contributions of $20,000 this takes his combined income to $305,000.

So Jack will only pay the additional 15% tax on $5,000 of his contributions (i.e. an additional $750).

Taxation

Income tax cuts put on hold 

The personal income tax cuts which involved increasing the tax-free threshold to $19,400, scheduled to commence on 1 July 2015, are deferred.

Medicare levy increased to 2% 

The Medicare levy will be increased by half a percentage point from 1.5 to 2 per cent from 1 July 2014 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 exemptions from the Medicare levy will also remain in place.

DisabilityCare Australia, the NDIS, is aimed at providing long-term, high quality support for individuals who have a permanent disability that significantly affects their communication, mobility and self-management. It is intended to improve the lives of people with a disability, their family, and carers by providing a lifetime approach towards individualised care and support. It is intended to devote resources to focus on early intervention by investing in remedial and preventative early intervention and also promote social and economic/workforce participation.

With this proposed increase to the Medicare levy, taking the top marginal tax rate to 47% (previously 46.5%), a number of other tax rates which are based on this combination will also be increased to 47% from 1 July 2014. These include increasing the:

• Fringe Benefits Tax (FBT) rate, and
• Excess contributions tax rate on excess non-concessional contributions.

Low-income threshold for Medicare Levy increased

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. The increase in these thresholds takes into account movements in the Consumer Price Index and ensures that low-income families are not liable to pay the Medicare levy.

For 2012-13, the Medicare levy low-income thresholds have increased to $20,542 for individuals and $32,279 for pensioners eligible for the Seniors Australians and Pensioners Tax Offset.

Tax offset for net medical expenses to be phased out

The net medical expenses tax offset (NMETO) will phase out from 1 July 2013, with transitional arrangements if you’re currently claiming the offset.

From 1 July 2013, if you claimed the NMETO for the 2012-13 income year you will continue to be eligible for the NMETO for the 2013-14 income year if you have eligible out of pocket medical expenses above the relevant thresholds. Similarly, if you claim the NMETO in 2013-14 you will continue to be eligible for the NMETO in 2014-15.

From 1 July 2015, the NMETO will continue to be available for out of pocket medical expenses relating to disability aids, attendant care or aged care expenses until 1 July 2019 when DisabilityCare Australia is fully operational and aged care reforms have been in place for several years.

Tax deductions for work-related self-education expenses capped at $2,000

From 1 July 2014 there will be an annual cap of $2,000 on tax deductions for work-related self-education expenses.

Social Security

Normal deeming rules to apply to account-based pensions

Under the current Centrelink rules, account-based pensions are fully assessable under the assets test.

However, income received from account-based pensions is currently treated more favourably than income generated by other financial investments such as bank accounts, shares and managed funds under the income test. This is because income from an account-based pension attracts a non-assessable portion, which loosely recognises that part of these pension payments represent a return of capital. In comparison, other financial investments are subject to deeming rules which attribute a fixed rate of return to these investments, irrespective of how much income they actually produce.

The Government proposes that these normal deeming rules will apply to new superannuation account-based income streams commenced after 1 January 2015. All account-based pensions held by pensioners before 1 January 2015 will be grandfathered and the existing rules (e.g. access to the non-assessable portion under the income test) will continue to apply, unless the product is changed on or after 1 January 2015.

Age Pension means test exemption for downsizing the family home

Under the pension means testing rules, the value of the family home is not assessed if the dwelling and adjacent land is less than 2 hectares. The Government believes that many older Australians may want to downsize and to move into more appropriate housing (e.g. retirement villages or granny flats) but are reluctant to do so in order to avoid the excess proceeds from sale of their home affecting their Age Pension.

Under this proposed measure, the Government will run a pilot which will offer a means test exemption for Age Pensioners and other pensioners over Age Pension age who are downsizing from their family home. Among other things, to qualify:

• the family home must have been owned for at least 25 years; and
• at least 80 per cent of the net proceeds from the sale (up to $200,000) must be deposited into a special account by an authorised deposit taking institution.

These funds (plus 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 exemption will also be accessible to people assessed as home owners who move into a retirement village or granny flat. It will not be available to people moving into residential aged care.

The pilot will commence on 1 July 2014 and be closed to new customers from 1 July 2017.

Families

Child Care Rebate frozen at $7,500 for four years 

Child Care Rebate (CCR) provides a 50 per cent rebate on out of pocket eligible child care expenses, up to the maximum of $7,500 per child per year.

The Government will continue to freeze the indexation of the annual cap on the CCR until 30 June 2017. This means that the maximum amount of CCR that can be paid will remain at $7,500 a year until 30 June 2017.

Upper income limits frozen for family-based payments

The Government will freeze the indexation of eligibility thresholds and amounts for certain family-based payments at their current levels until 1 July 2017.

This will mean that the current upper threshold limit will be maintained for the following payments until 30 June 2017:

• $150,000 for the Paid Parental Leave Scheme, FTB Part B, certain dependency tax offsets, Dad & Partner Pay, and
• The FTB Part A upper income limit will remain at $94,316, plus an additional $3,796 for each child after the first.

Further, the FTB supplement rates will be maintained at current levels of $726.35 per child per annum for FTB Part A and $454.05 per family per annum for FTB Part B.

Baby Bonus replaced by lower payment to families receiving Family Tax Benefit (Part A) 

The Baby Bonus is currently set at $5,000 per eligible child. The Government has proposed that the Baby Bonus will no longer be available from 1 March 2014.

Instead, if you do not qualify for Paid Parental Leave (PPL), the Government will increase the Family Tax Benefit Part A (FTB Part A) as follows:

• by $2,000, to be paid in the year following the birth or adoption of a first child or each child in multiple births, and
• $1,000 for second or subsequent children.

The additional FTB Part A would be paid as an initial payment of $500, with the remainder to be paid in seven fortnightly instalments.

If you take up PPL you will not be eligible for this additional FTB Part A component. However, the Government proposes that from 1 March 2014 you will be able to use the period while you are in receipt of Government PPL towards the work test requirements for assessing eligibility for PPL for a subsequent child. This treatment will be consistent with how the employer funded parental leave is treated for the work test purposes for PPL now.

Family Tax Benefit (Part A) restricted to children at school

From 1 January 2014, FTB Part A will only be paid until the end of the calendar year your child completes school.

If your child no longer qualifies for FTB Part A, they may be eligible to receive Youth Allowance, subject to the usual eligibility requirements.

 That’s it for our Budget wrap up. Don’t forget, the proposals may change as the legislation passes through parliament, should you have any questions please contact the office on (03) 9999 7200.