News

2008-09 FEDERAL BUDGET

On Tuesday, 13 May 2008, the Federal Treasurer, the Hon Wayne Swan MP, handed down the 2008-09 Federal Budget. Despite rumors that the superannuation system might have come in for some attention, the 2008-09 Federal Budget did not announce any substantive changes concerning superannuation. There were no changes to the current contributions regime, tax-free status for most benefits after age 60, transition to retirement pensions or the tax exemption for superannuation fund assets set aside to pay pensions. However, there are some consequences to superannuation from a taxation and social security point of view.

SUPERANNUATION

1. First Home Saver Accounts

First Home Saver Accounts (FHSAs) will be able to be offered by ADIs (banks, building societies and credit unions), life companies (including friendly societies) and Public Offer super fund trustees (as a separate trust — not as part of a super fund). The objective of this initiative is to assist Australians to save a deposit for the purchase of their first home by providing a Government contribution and concessional taxation of account earnings,

FHSAs will be able to be offered from 1 October 2008, although it is unclear at this stage whether providers will have products available by this date.

To be eligible to open an FHSA a person must:

  • be between 18 and 65
  • never have purchased or built a first home in Australia in which to live
  • not hold or not have held an FHSA previously.

There will be no prescribed minimum initial or annual contribution, but providers may set their own limits.

Some of the rules include:

  • generally holding the account over at least 4 financial years
  • once the account balance reaches $75,000 (indexed), no further contributions will be able to be made
  • withdrawals will generally only be allowed where contributions of at least $1,000 have been made in each of at least 4 financial years.

The benefits will include the following:

  • contributions can be made by the account holder or any other person
  • all contributions will be treated as post-tax amounts and will not be taxed in the account
  • account earnings will be taxed at a statutory rate of 15% (rather than the individual’s marginal tax rate) — consistent with the regime applying to superannuation funds
  • contributions up to $5,000 p.a will be eligible for a Government contribution into the account, provided that the person is an Australian resident for taxation purposes. The Government will contribute 17% of the first $5,000 (indexed) of contributions made each year (i.e., $850 if $5,000 or more is contributed).
  • amounts withdrawn from an account to purchase a first home (subject to meeting the relevant rules) will be tax-free.

Further details will be provided once the legislation has been introduced into Parliament.

2. Removal of Same Sex Discrimination

Changes will be made to a wide range of Commonwealth laws, including superannuation, tax and social security to remove discrimination against couples in a same sex relationship. Some of the changes will be phased-in, but all of the changes are expected to be in place by mid 2009.

Impact

In terms of superannuation, changes would be expected to impact contributions splitting, spouse contributions, and possibly the anti-detriment provisions which have the effect of increasing the amount of a lump sum death benefit.

3. Super Clearing House

The Government has announced it will provide funding to set up a superannuation clearing house facility to receive employers’ superannuation contributions, from 1 July 2009. The clearing house will enable employers to pay all their employees’ super contributions to a single location. The clearing house facility will then forward the contributions to the superannuation fund selected by the employee. It will not be mandatory for employers to use the clearing house facility. The Government will meet the cost of the facility for businesses with less than 20 employees and will be available on a fee-for-service basis for businesses with more than 20 employees.

An employer’s legal obligation to make superannuation contributions will be met once they have paid the correct amount to the clearing house.

4. Payment of Temporary Residents Balances to the ATO

The Government is proposing that the ATO will identify accounts held by former and current temporary residents and notify the superannuation funds holding these accounts. The funds would then be required to pay the temporary residents’ balances to the ATO. It is proposed that this will occur on an annual basis.

Temporary residents who leave Australia will be able to claim back their balance (less the existing withholding tax) within 5 years of departure. No interest will be paid on amounts held by the ATO.

Temporary residents who become permanent residents will be able to reclaim their balances ‘with interest’ (at a prescribed rate) and the amounts will generally be paid into a superannuation fund.

Employers will still be required to pay SG contributions for temporary residents.

TAXATION

1. Reductions in personal income tax

In line with previous announcements, the Government has confirmed increases in the top three income tax brackets to apply from 1 July 2008 (see table below).

It is then proposed that the 30% income tax bracket will not cut in until income reaches $35,000 from 1 July 2009 and $37,000 from 1 July 2010. In addition, cuts to the personal tax rate will reduce the 40% tax rate to 38% from 1 July 2009 and 37% from 1 July 2010.

The Government has also set an aspirational plan to flatten Australia’s tax system over six years by reducing the number of personal income tax rates from four to three, with a personal income tax scale of 15%, 30% and 40%.

Current and proposed thresholds for the personal income tax rates are shown below:

Tax Thresholds from 1 July 2007
Low threshold
High threshold
Tax Rate %
-
6,000
-
6,001
30,000
15
30,001
75,000
30
75,001
150,000
40
150,001
45

 

Tax Thresholds from 1 July 2008 (2008 Budget)
Low threshold
High threshold
Tax Rate %
-
6,000
-
6,001
34,000
15
34,001
80,000
30
80,001
180,000
40
180,001
45
Tax Thresholds from 1 July 2009 (2008 Budget)
Low threshold
High threshold
Tax Rate %
-
6,000
-
6,001
35,000
15
35,001
80,000
30
80,001
180,000
38
180,001
45
Tax Thresholds from 1 July 2010 (2008 Budget)
Low threshold
High threshold
Tax Rate %
-
6,000
-
6,001
37,000
15
35,001
80,000
30
80,001
180,000
37
180,001
45

These rates apply to individuals who are residents of Australia for taxation purposes for the whole financial year. The rates above do not include Medicare Levy of 1.5%.

The Low Income Tax Offset (LITO) has also been increased from $750 to $1,200 from 1 July 2008, phasing out after $30,000 by 0.04 cents in the dollar to a maximum of $60,000. Further increases in the LITO will apply from 1 July 2009 and 1 July 2010. Current and proposed LITO and effective tax free thresholds are shown below:

LITO
2007/08
$750
2008/09
$1,200
2009/10
$1,350
2010/11
$1,500
Effective tax free threshold
$11,000
$14,000
$15,000
$16,000

 

Impact From 1 July 2008:

  • Most income earners will receive a higher net income.
  • The number of income earners eligible for the Low Income Tax Offset will increase, as the threshold at which the offset begins to phase out has been increased.
  • Superannuation will remain attractive despite many income earners paying a lower marginal rate of tax on their income.
  • Diverting tax savings to superannuation via salary sacrifice can increase a client’s superannuation balance, without affecting current after tax income. Care should be taken to ensure that the concessional contributions cap is not exceeded (for 2007108 this is $50,000 or $100,000 for individuals aged 50 or over and these are not expected to increase in 2008/09). For clients on lower marginal tax rates, using these tax savings to make personal after-tax contributions together with the Government co-contribution may give a better result.

2. Reductions in Personal Income Tax – Senior Australians

The proposed reductions in personal income tax result in a lift to 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.

Proposed effective tax free thresholds for SATO recipients:

 

Single
2007/08
$25,867
2008/09
$28,867
2009/10
$29,867
2010/11
$30,685
Couple
$43,360
$49,360
$51,360
$53,360

 

Impact

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.

3. CGT Small Business Concessions

The Government has confirmed it will implement a measure announced but not legislated by the previous government, to the small business CGT concessions by allowing:

  • taxpayer owning an asset used in a business by an affiliate or related entity; and
  • a partner who owns an asset used in the partnership business; to access the small business CGT concessions.

SOCIAL SECURITY

1. Definition of Income for Income Tested Salary Sacrifice

With effect from 1 July 2009, income tests used to determine a range of government financial assistance programs (such as income support payments, the Government co-contribution, family assistance payments, tax offsets, Commonwealth Seniors Health Care Card, child support, and other financial and retirement savings assistance delivered through the tax system) will be tightened to include non-wage remuneration, such as salary sacrificed contributions to superannuation. Individuals who have access to salary sacrifice to reduce taxable income will be treated on anequivalent basis to those who do not nave access to salary sacrifice arrangements.

Further changes will include reportable fringe benefits being assessed as income (where they are not already included) and net financial investment losses being added back in to income.

2. Bonus Payment for Seniors

A bonus of $500 will be provided to individuals over age pension age (or service pension age, where qualifying) in receipt of the following payments at 13 May 2008:

  • Age pension
  • Veterans’ Affairs pensions
  • Widow B pension
  • Wife pension
  • Seniors concession allowance
  • Mature age allowance
  • Widows allowance
  • Partner allowance

To be eligible, an individual must be receiving a qualifying payment, or have made a claim for a payment, on or before 13 May 2008. The individual must also be in Australia or temporarily absent from Australia for not more than 13 weeks.

The bonus will not be taxable nor will it be assessed as income for Social Security or Department of Veterans’ Affairs purposes and will automatically be paid on or prior to 30 June 2008.

Commonwealth Seniors Health Card

The Commonwealth Seniors health card will be subject to new compliance checks and the income test will be changed. Compliance checks, including data matching and eligibility reviews, will be progressively rolled out from 1 July 2008.

Changes to income testing for the cards will apply from 1 July 2009, with the following being included as income:

  • Income from superannuation income streams from a taxed source
  • Salary that is sacrificed to superannuation

Disclaimer  

This document is to be used as general information only and should not be considered a comprehensive statement on any matter and should not be relied upon as such. This document has been prepared without taking into account any individual objectives, financial situation or needs.No member of Evolution Super, nor any of their employees or directors gives any warranty of accuracy or reliability nor accepts any liability in any other way, including by reason of negligence for any errors or omissions contained herein, to the extent permitted by law.This document may not be used or reproduced without the prior consent of the Evolution Super.Please contact Evolution Super on (08) 8271 2711 if you would like more information.