A number of key reports and responses have been released by the Government over the past month or two which will cause changes to superannuation and financial services landscape. In April the Government released the ‘Future of Financial Advice’ package to overhaul the provision of financial advice in Australia. The package is the Government’s response to the report (Ripoll Report). Since then the Government has released the Henry report, and its response, as well as the Federal Budget. In the coming months the Cooper Report will be handed down, which will review the Super System, including Self Managed Super Funds.

In this article we will focus on the Henry Report and the Federal Budget and what it means for you.

Henry Tax Report

On Sunday, 2 May 2010, the Government publicly released the Henry Tax report and its initial response. The Henry Report contained sweeping recommendations to reform Australia's tax system, with some 138 recommendations made. The Government response deals with less than 50 of the recommendations and has initially focused on the resources sector and superannuation. The company tax rate is also to be reduced and there are some benefits for small business.

Main reforms

The highlights are:

  • a Resource Super Profits Tax that will tax non-renewable resource projects (at a rate of 40%) on their profits rather than just their production (taxpayers will be eligible for a credit for royalties paid to State and Territory Governments) - this will apply from 1 July 2012;
  • a refundable tax offset (the Resource Exploration Rebate) at the company level, set at the prevailing company tax rate, for exploration expenditure in Australia incurred on or after 1 July 2011;
  • reduction in company tax rate to 28% - small businesses will benefit from 2012-13, but it will be phased in for other companies (29% for 2013-14 and 28% from 2014-15);
  • small businesses will be able to immediately write-off assets valued at under $5,000 (currently $1,000) and all other assets (except buildings) will be written off in a single depreciation pool at a rate of 30% - this will apply from 1 July 2012;
  • super contribution cap: workers aged 50 and over with super balances below $500,000 will be able to make up to $50,000 in annual, concessional superannuation contributions - to apply from 1 July 2012;
  • Superannuation Guarantee age limit will be increased from 70 to 75 from 1 July 2013;
  • Superannuation Guarantee rate will rise to 12% by 2019-20 (to be phased in); and
  • Government will provide a $500 annual superannuation contribution to individuals with an adjusted taxable income up to $37,000.

2010-11 FEDERAL BUDGET REPORT

On 11 May 2010, the Federal Treasurer, the Hon Wayne Swan MP, handed down the 2010-11 Federal Budget. There were few surprises and few new measures announced. This was a “no frills” budget, which unsurprisingly, re-affirmed the changes announced as part of the Henry Report response.

Detailed below are a number of the superannuation and taxation measures announced.

SUPERANNUATION

Permanent reduction to Government Co­-Contribution

Effective 1 July 2010, the current maximum Government co-contribution of $1,000 and the 100% matching rate will be permanently retained. In addition, indexation of the lower co-contribution threshold will be frozen for two years meaning the threshold will remain at the current level of $31,920 for 2010/11 and 2011/12.

In last years budget, the Government announced the temporary reduction to the maximum co-contribution and matching rate with plans to apply gradual increases to return the maximum co-contribution to $1,500 and the matching rate to 150% by 2014/15. This will no longer occur.

The following table shows how the co-contribution entitlement for different income ranges:

Total Income

Co-Contribution Entitlement

$31,920 or less

$1,000
$31,920 - $61,920

$1,000 less 3.333 cents for every $1 of total Income over $31,920
$61,920

No entitlement

Key Considerations
As a rule of thumb, for 2010/11, individuals with total income under $54,500 p.a and $1,000 of after tax money available to contribute to super will be better off making an after-tax contribution of $1,000 than salary sacrificing an equivalent pre-tax (grossed up) amount. This is because the benefit received by the Government co-contribution is higher than the equivalent tax savings available through salary sacrifice.

Minimum pension reduction NOT extended

The Government has NOT extended the 50% reduction in minimum annual payment amounts for certain retirement income streams. The standard minimum pension payments will apply from the 2010/11 financial year onwards.

Key Considerations

Centrelink/DVA clients who were receiving less than the standard minimum payment in 2009/10 should be aware that their Centrelink benefits may be affected. These clients will need to advise Centrelink/DVA of their change in circumstances within 14 days. This is an existing Centrelink/DVA requirement for notification of change in circumstances.

Increasing the Superannuation Guarantee rate to 12%

Start date 1 July 2013

The Superannuation Guarantee (SG) rate will be increased from 9% to 12% by 1 July 2019. This will commence with a 0.25% increase for the 2013/14 financial year. The table below illustrates the proposed lime table for the full 3% increase.

Financial Year

SG Rate (%)

2013/14

9.25
2014/15

9.5
2015/16 10
2016/17 10.5
2017/18 11
2018/19 11.5
2019/20

12

Key Considerations

In the long term, employees will have more savings in retirement, placing less pressure on the Age Pension. The decision to defer the commencement of the rate increase until 2013/14 recognises that employers and employees will need time to factor these increases into their future wage negotiations.

Super Guarantee age limit increase from 70 to 75           

The Superannuation Guarantee (SG) age limit will be raised from 70 to 75.

Currently, compulsory SG only applies to those aged less than 70.

This proposed change is due to commence on 1 July 2013.

Key Considerations

  • The increase to age 75 aligns the SG age limit with the age limit for personal and voluntary employer contributions, simplifying superannuation contribution requirements.
  • Provides greater incentive for mature workers to remain in the workforce.
  • The deferred start date allows employers and employees time to factor these increases into their future wage negotiations.

Low Income earners Government Contributions

The Government plans to introduce a Government superannuation contribution for low income earners.

Individuals will need to have an adjusted taxable income (ATI) of less than $37,000 to receive up to a maximum of $500 per year.

The Government contribution would be calculated as 15% of the concessional contributions paid by or for individuals with an ATI less than $37,000.

The maximum contribution of $500 is equivalent to the tax an employee with an ATI of $37,000 would pay on their SG contributions calculated as follows.

$37,000 x 9% (SG rate) = $3,330 x 15% (tax rate deducted by super fund) = $499.50,

Note that by 1 July 2012, when this measure is proposed to commence, the marginal rate of tax for individuals earning between $6,001 and $37,000 will be 15% (this income tax threshold change is already legislated to apply from 1 July 2010).

The first Government contributions are expected to be paid into an eligible individual’s superannuation account during 2013/14 for concessional contributions made during 2012/13. This payment lag is similar to the existing Government Co-contribution arrangements.

Individuals may be eligible for both the ‘low income earners Government contribution” and the existing Government Co-contribution.

Key Considerations

This measure effectively means for eligible individuals the 15% tax on concessional contributions will be refunded making super an attractive savings vehicle for all taxpayers; not just those on a marginal tax rate greater than the super fund tax rate.

It is unclear whether this measure is limited to SG or all concessional contributions.

Changes to the Concessional Contributions Cap

Currently the transitional concessional contributions cap is $50,000 per annum for those aged 50 and older.

This transitional cap will expire on 30 June 2012. It will, however, now be replaced with a new concessional contributions cap from 1 July 2012 for individuals aged 50 or over.                       
Under the new concessional contributions cap, individuals will be able to make (or have made on their behalf) concessional contributions of $50,000 pa provided they are:

  • aged 50 and over and
  • have total superannuation balances of less than $500,000.

Key Considerations

While the new concessional contributions cap for those aged 50 and over is not as generous as the current one, it is better than not having one at all. It will provide benefits to many:

  • undertaking transition to retirement strategies;
  • who delay focusing on building up their retirement assets until they have paid off their mortgage and educated their children: and
  • who may have made unwise investment decisions, or experienced a down turn in investment markets.

 Clients who reach age 50, but who have total superannuation of over $500,000 will not benefit from this change.

There is no change to non-concessional Contribution Caps

TAXATION

Reductions In Personal Income Tax

Effective date: 1 July 2010

These reductions in personal income tax have been previously legislated by the Government. The changes include an increase in the amount of income you can ear 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:

Current

From 1 July 2010
Taxable income Rate Taxable income Rate
0- $6,000 0% 0- $6,000 0%
$6,001- $35,000 15% $6,001- $37,000 15%
$35,001- $80,000 30% $37,001- $80,000 30%
$80,001- $180,000 38% $80,001- $180,000 37%
$180,001+ 45% $180,001+ 45%

These rates apply to Australian residents for taxation purposes and do not include the Medicare Levy of 1.5%

The Low Income Tax Offset will increase from $1,350 to $1,500 for 2010/11, phasing out after $30,000 by 4 cents in the dollar until phasing out completely until taxable income reaches $67,500.

Key Considerations

From 1 July 2010:

  • All income earners with taxable income of more than $15,000 will receive a higher net income as a result of either the increase in the Low Income Tax Offset and/or the increase in the 30% tax bracket.
  • Individuals will not be subject to tax until their taxable income exceeds $16,000 (up from $15,000). This means those with taxable income up to $30,000 will receive the first $16,000 tax free.
  • Salary sacrificing these tax savings to superannuation on a before-tax basis is a tax effective way to increase a client’s superannuation balance, without affecting current after-tax income. Existing and new salary sacrifice arrangements should be reviewed to ensure that the concessional contributions cap is not exceeded (for 2010/11 this is $25,000 or $50,000 for individuals aged 50 or over).
  • For investors on lower marginal tax rates, using these tax savings to make personal after-tax contributions together with the Government co-contribution will generally give a better result.

Reductions in Personal Income Tax – Senior Australians

The reductions in personal income tax result in an increase in 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,

From 1 July 2010:

  2009/10

2010/11

Extra Tax Free Income
Single $29,867

$30,684

$817
Couple $51,360 $53,360

$2,000

Key Considerations

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.

Standard Tax Deductions

Effective date: 1 July 2012 for standard $500 deduction
1 July 2013 for standard $1,000 deduction

Individual taxpayers will have the option of receiving a standard deduction for work related expenses and the cost of managing tax affairs, Taxpayers with deductible expenses greater than the standard deduction amount will be able to claim their higher expenses when lodging their tax return under the existing rules. The standard deduction will be $500 in 2012/13 and will increase to $1,000 from 1 July 2013.

Key Considerations

Taxpayers will spend less time and effort in preparing ‘simpler’ tax returns

50% discount on up to $1,000 interest Income

Effective date: 1 July 2011
           
The Government has announced a 50% discount on the first $1,000 of interest income.

From 1 July 2011, the Government will provide individuals a 50% tax discount on up to $1,000 of interest earned from a range of savings products. The savings products attracting the concessions include bonds, debentures and annuity products as well as deposits held with a bank, building society or credit union.

Key Considerations

Example A: On 1 July, 2011 an individual deposited $10,000 in a one-year term deposit with an effective rate of 5% per annum, earning $500 after one year. The tax payer would be required to include only $250 of this interest income in their tax return.

Example B: On 1 July, 2011 an individual deposited $40,000 in a one-year term deposit with an effective rate of 5% per annum, earning $2,000 after one year. The tax payer would be required to include only $1,500 of this interest income in their lax return.

Overall Conclusions:

  • Younger individuals will need to consider preservation issues when deciding between superannuation and interest accounts.
  • Where preservation is less of a concern, then superannuation may be the preferred investment vehicle, especially where the individual is eligible for the Government Co-contribution are on a high marginal tax rate.
  • Low income earners who are not receiving 10% or more of their income from employment or eligible business activities (or both) are not eligible for the Government Co-contribution.
  • It is important to remember that while it may be possible for an individual to contribute to superannuation until age 75 if gainfully employed, only those aged 70 or younger at the end of the income year are eligible for the Government Co-contribution.

Sources:

  • BT Financial Group 2010 Federal Budget De-Brief released 12 May 2010
  • www.futuretax.gov.au