budget 2012Budget Highlights 2012 sees a return to Budget surplus. It reflects the government’s attempt to ensure that families and small business share in the benefits of the resource boom.

It would be fair to say that everyone will be impacted in some way by the measures contained in the Budget itself, or by other recent announcements from the Government that will apply from 1 July 2012. We have listed below some of the measures announced.

Many of the measures in the Budget had been alluded to in the days leading up to the Budget itself, so there weren’t a lot of hidden surprises. However, one major surprise was the Government’s decision to defer the introduction of a higher superannuation contribution threshold for people aged 50 or over to 1 July 2014.

This deferral announcement, along with many other measures released, does highlight the need to establish and have an on-going relationship with a financial planner. Whilst everyone is likely to be impacted by the Budget announcements in some way, some will be impacted more. With a constantly changing legislative environment as the Government seeks to deliver a Budget surplus, there can be no substitute for receiving advice from your financial planner as to how these measures affect your personal circumstances, and to have someone to guide you through the changes.

Despite largely having been announced previously, most measures will still need legislation to be introduced, so the final version of the changes may differ to the announcements made in the Budget. As with all changes, it is important that you speak with your financial adviser to determine how these announcements will impact on your personal situation.

TAXATION –

Personal income tax changes (already legislated)

The changes to personal income tax rates and thresholds was not a 2012 Budget measure, although was referenced in the Treasurer’s speech. These changes were initially announced with the introduction of the Carbon Pricing Scheme back on 10 July 2011 and have since been legislated.

Current 2011/12 From July 1 2012 From 1 July 2015
Taxable Income Marginal Rate Taxable Income Marginal Rate Taxable Income Marginal Rate
$0 –                 $6,000 0% $0 –               $18,200 0% $0 –              $19,400 0%
$6,001 –        $37,000 15% $18,201 –    $37,000 19% $19,401 –    $37,000 19%
$37,001 –     $80,000 30% $37,001 –    $80,000 32.5% $37,001 –    $80,000 33%
$80,001 –  $180,000 37% $80,001 –  $180,000 37% $80,001 –  $180,000 37%
$180,001 and above 45% $180,001 and above 45% $180,001 and above 45%

*Table excludes Medicare levy and temporary Flood Levy applicable in 2011/12

In conjunction with these, the maximum Low Income Tax Offset (LITO) will be reduced from $1,500 to $445 with effect from 1 July 2012 and to $300 from 1 July 2015. The threshold at which LITO will begin to phase out will be increased from $30,000 taxable income in the current year to $37,000 from 1 July 2012. The phase out rate will also be reduced from 4% to 1.5%.

The overall impact of these changes from 1 July 2012 is:

  • an increase in the effective tax free threshold from $16,000 to $20,542;
  • a reduction in personal tax for those on income below $80,000; and
  • for those on taxable incomes greater than $80,000, a negligible $3 personal tax saving.

Removal or reduction in Private Health Insurance rebate (already legislated)

Whilst not raised in this year’s Budget, it is important to be aware that from 1 July 2012 the existing Private Health Insurance rebate will be scaled back or removed for those earning $84,000 or above (singles) or at least $168,000 (couples), with an increase in the Medicare Levy Surcharge for those who opt out of private health insurance. The level of rebate  available or potential Medicare Levy Surcharge that could be imposed is set out in the following table.

Income Level of rebate based on age Medicare
Levy
Surcharge
Single Couple <65 65 to 69 70+ 
<$84,000 <$168,000 30% 35% 40% Nil
$84,000 – $96,999 $168,000 – $193,999 20% 25% 30% 1%
$97,000 – $129,999  $194,000 – $259,999 10% 15% 20% 1.25%
$130,000 + $260,000 + Nil Nil Nil 1.5

As an example, for a single person earning more than $130,000 per annum, they will lose the current 30% private health insurance rebate. For every $1,000 of premium, this is an extra $300 that the individual will have to now pay. However, if they chose not to have the private health cover, at $130,000 of taxable income, the Medicare Levy Surcharge would equate to $1,950. Most private health funds are offering the ability to pre-pay premiums for a 12 month period. If clients make these payments before 30 June to cover the 2012/13 financial year, they will still receive the full rebate as it is based at the time of payment.

Living away from home allowances

Payments of a Living Away From Home Allowance (LAFHA) generally can qualify for tax exempt treatment as well as concessional (or exempt) treatment for fringe benefits tax (FBT) purposes.

Subject to some exemptions, the Government has proposed to amend the FBT treatment and prevent misuse of the exemption by allowing non-residents to only access the benefit if they also maintain a home for their own use in Australia, which they are then living away from to qualify for the LAFHA. This change will essentially treat non-residents in the same manner as permanent residents. The concessional treatment of the LAFHA will also only be available for a maximum period of 12 months for an individual in any particular location (ie will prevent the concessions being indefinitely available).

Changes to tax rates for non-residents

The personal income tax rates and thresholds that apply to non-residents’ Australian income will be adjusted. From 1 July 2012, the first two marginal tax rate thresholds will be merged into a single threshold. The marginal rate for this threshold will align with the second marginal tax rate for residents (32.5%) and will apply to all taxable income below $80,000.

A non-resident with Australian taxable income of $80,000 is currently subject to tax of $23,630. This will increase to $26,000 ($80,000 x 32.5%) from 1 July 2012.

From 1 July 2015, the same marginal rate will rise from 32.5% to 33% (again aligning it with the second marginal rate for residents at that time).

Removal of capital gains tax discount for non-residents

The 50% capital gains tax (CGT) discount will no longer be available for non-residents on capital gains accrued after 7.30pm on 8 May 2012. The CGT discount will remain available for capital gains accrued prior to this time where non-residents choose to obtain market valuations of assets as at 8 May 2012.

Capital gains tax and loss relief to facilitate super reforms

Amendments will be made to ensure income tax considerations do not prevent mergers of superannuation funds or transfers of existing default members’ balances and relevant assets in the transition to Stronger Super and MySuper.

From 1 June 2012 to 1 July 2017, optional loss relief will be available for mergers of complying super funds on the same terms and conditions as the former temporary loss relief that applied from 24 December 2008 to 30 September 2011, with some exceptions, including an optional roll over for capital gains and appropriate integrity provisions.

From 1 July 2013 to 1 July 2017, an optional roll-over and loss relief will also be made available for capital gains and losses on mandatory transfers of default members’ balances and relevant assets to a MySuper product in another complying superannuation fund.

Capital gains tax – broadening the exemptions for certain compensation payments and insurance policies

Minor extensions to the CGT exemptions for certain compensation payments and insurance policies will be made with effect from 2005-06. The measure will disregard CGT consequences where a taxpayer receives compensation, damage or certain insurance proceeds indirectly through a trust. This will ensure that the taxpayer has the same CGT outcome as a taxpayer who receives such proceeds directly.

It also ensures that insurance policies owned by super funds that were treated as being CGT exempt prior to the 2011-12 Budget changes to compensation payments and insurance policies, continue to be CGT exempt.

Increase in managed investment trust final withholding tax rate

The managed investment trust final withholding tax rate will be increased from 7.5% to 15% from 1 July 2012. This reverses a 2009-10 Budget decision to lower the tax rate Increase in managed investment trust final withholding tax rate from 30% to 7.5%.

Medicare low income thresholds

The Medicare low income thresholds will increase to $19,404 for individuals and $32,743 for families for 2011-12. The additional amount of threshold for each dependent child or student will also increase to $3,007.

The Medicare levy threshold for single pensioners below Age Pension age will increase to $30,451 for 2011-12. This ensures that pensioners below Age Pension age do not pay the Medicare levy when they do not have an income tax liability.

From 1 July 2012, the low income threshold for pensioners below Age Pension age will be fixed at the level applicable to seniors entitled to the Seniors Australian Tax Offset (SATO) as part of the merger of the pensioner tax offset into the SATO, which was announced as part of the Clean Energy Future Plan household assistance package.

 Changes to the net medical expenses tax offset

A means test will be introduced for the net medical expenses tax offset from 1 July 2012.

For people with adjusted taxable income above the Medicare levy surcharge thresholds ($84,000 for singles and $168,000 for couples or families in 2012-13), the threshold above which a taxpayer may claim net medical expenses tax offset will be increased to $5,000 (up from $2,060 currently) and indexed annually and the rate of reimbursement will be reduced to 10% (down from 20%) of eligible out of pocket expenses.

Those with income below the surcharge thresholds will be unaffected.

This offset is very valuable for clients in aged care facilities with a tax liability as the majority of aged care fees qualify as eligible medical expenses.

Mature age worker tax offset

The mature age worker tax offset will be phased out from 1 July 2012 for taxpayers born on or after 1 July 1957. Access to the mature age worker tax offset will be maintained for taxpayers who are 55 or older in 2011-12.

The maximum offset of $500 is currently available for mature age workers with net income from working between $10,000 and $53,000.

Schoolkids Bonus 

The existing Education Tax Refund for school expenses will be replaced with a ‘Schoolkids bonus’ from 1 January 2013. Each year, families will receive a Schoolkids bonus worth $410 for each primary school child and $820 for each child in high school.

The payment will be automatic and paid upfront, twice a year, in January and July. This means that parents will not have to keep receipts to receive a payment as with the current Education Tax Refund system. The bonus will be available to families receiving Family Tax Benefit Part A and young people in school receiving Youth Allowance and some other income support payments.

For 2011-12, the Education Tax Refund will be paid to all eligible families as a lump sum payment in June ahead of time, meaning that parents will not have to keep receipts or make claims in their tax return this year.

 Company loss carry-back 

Companies will be allowed to ‘carry back’ their tax losses so they receive a refund against tax previously paid. Currently, businesses are only able to carry forward their tax losses to offset future profits and reduce future tax liabilities.

From 1 July 2012, companies will be able to carry back up to $1 million worth of losses to get a refund of tax paid in the previous year. From 1 July 2013, companies will be able to carry back up to $1 million worth of losses against tax paid up to two years earlier. This will provide a cash benefit of up to $300,000 a year.

This will be available to companies and entities that are taxed like companies and apply to their revenue losses only.

The government will release a discussion paper on this measure shortly.

 Business instant write off 

From 1 July 2012, small business will be able to immediately deduct the cost of any new business asset costing less than $6,500 for as many assets as they purchase. Businesses will also be able to write-off assets costing $6,500 or more in a single pool (15% in the year they are purchased and 30% in each subsequent year).

From 1 July 2012, small businesses will be able to instantly write off the first $5,000 of the cost of a new or used motor vehicle.

SUPERANNUATION –

Deferral of higher concessional contribution cap

The start date of the higher concessional contributions cap will be deferred by two years, from 1 July 2012 to 1 July 2014.

Under the higher concessional contributions cap measure, individuals aged 50 and over with superannuation balances below $500,000 will be able to make up to $25,000 more in concessional contributions than allowed under the general concessional contributions cap.

For 2012-13 and 2013-14, all individuals will be able to make concessional contributions of up to $25,000 as permitted under the general concessional contributions cap.

 Reduction of tax concession for concessional contributions for very high income earners 

From 1 July 2012, individuals with income greater than $300,000 will have the tax concession on their concessional contributions reduced from 30% to 15% (excluding the Medicare levy).

The definition of ‘income’ for the purpose of this measure includes taxable income, concessional contributions, adjusted fringe benefits, total net investment loss, target foreign income, tax-free Government pensions and benefits, less child support.

If an individual’s income excluding their concessional contributions is less than the $300,000 threshold, but the inclusion of their concessional contributions pushes them over the threshold, the reduced tax concession will only apply to the part of the contributions that are in excess of the threshold.

‘Concessional contributions’ for the purpose of this measure include employer contributions (superannuation guarantee and salary sacrifice contributions) and personal contributions for which a deduction has been claimed. For members of defined benefit funds (funded and unfunded), it will include notional employer contributions.

The reduced tax concession will not apply to concessional contributions which exceed the concessional contributions cap and are therefore subject to ‘excess contributions tax’.

Employment termination payment tax offset

From 1 July 2012, only that part of an affected employment termination payment (ETP), such as a golden handshake, that takes a person’s total annual taxable income (including the ETP) to no more than $180,000 will receive the ETP tax offset.

Amounts above this whole-of-income cap will be taxed at marginal rates. The whole-of income cap will complement the existing ETP cap ($175,000 in 2012-13, indexed) which ensures that the tax offset only applies to amounts up to the ETP cap.

The ETP tax offset ensures that ETPs up to the ETP cap are taxed at a maximum tax rate of 15% for those over preservation age and 30% for those under preservation age. Existing arrangements will be retained for certain ETPs relating to genuine redundancy (including to those aged 65 and over), invalidity, compensation due to an employment-related dispute and death.

Other superannuation measures

Whilst not specifically discussed in the 2012 Budget, the Government has previously announced a number of other superannuation measures that will have an impact from 1 July 2012 (or later years).

These include:

The introduction of a low-income earner contribution from 1 July 2012 of up to $500 for those with incomes up to  $37,000. This essentially represents a refund of tax on concessional contributions.
The reduction in Government co-contribution from a maximum matching of $1,000 to $500 from 1 July 2012.
The gradual increase in the superannuation guarantee (SG) charge rate from 9% to 12%, commencing from 1 July 2013.
The removal of an age limit for SG contribution entitlements from 1 July 2013
The availability of CGT relief upon the merger of superannuation funds
The availability of CGT relief on default super arrangements transitioning to MySuper arrangements from 1 July 2013.

SOCIAL SECURITY –

Change to age of eligibility for Family Tax Benefit Part A 

From 1 January 2013, the eligibility for Family Tax Benefit (FTB) Part A will be limited to young people under 18 years of age or, where a young person remains in secondary school, the end of the calendar year in which they turn 19. Individuals who no longer qualify for FTB Part A may be eligible to receive Youth Allowance subject to usual eligibility requirements.

Increasing the rate of Family Tax benefit Part A 

From 1 July 2013, the maximum payment rate of FTB Part A will increase by $300 per annum for families with one child and $600 per annum for families with two or more children.
For families receiving the base rate of FTB Part A, the increase will be $100 per annum for families with one child and $200 per annum for families with two or more children.

Liquid assets waiting period

From 1 July 2013, the maximum reserve amount will increase for the liquid assets waiting period for recipients of particular income support payments. Liquid assets are assets in the form of cash or those which can be easily converted into cash, including shares and term deposits.

A single person without dependents will now have an increased maximum reserve amount of $5,000, while a person who is a member of a couple and/or has a dependent child will now have an increased maximum reserve amount of $10,000. The change will affect applicants for Newstart Allowance, Youth Allowance, Sickness Allowance and Austudy payments.

New income support supplement

Commencing on 20 March 2013, an ongoing, non-taxable payment will be made to recipients of Newstart Allowance, Sickness Allowance, Youth Allowance, Austudy, ABSTUDY, Special Benefit, Parenting Payment Single, Parenting Payment Partnered, Transitional Farm Family Payment and the Exceptional Circumstances Relief Payment to assist with the cost of living pressures.

The new supplement will provide $210 per annum for eligible singles and $175 per annum for each member of an eligible couple. The supplement will be paid in two instalments, in March and September each year.

Australian working life residency

From 1 January 2014, Age Pension recipients who are overseas for more than 26 weeks will be paid their maximum entitlement of pension only if their Australian Working Life Residence (AWLR) is 35 years or more, rather than 25 years as applies under current arrangements. Pension recipients with less than 35 years AWLR will be paid a proportional rate.

Pensioners overseas on the date of implementation will not be affected by this change unless they return to Australia for at least 26 weeks. In addition, all partnered pensioners residing overseas will be paid based on their own AWLR rather than their partner’s AWLR.

Portability of Australian Government payments

From 1 January 2013, the period of time that people who travel overseas will continue to be paid will be reduced from 13 to 6 weeks for most income support and family payment recipients.

Beneficiaries who are outside Australia on the date of implementation will retain the 13 week portability of their payments until they return to Australia. The Age Pension will be excluded as it can be paid overseas indefinitely, once certain criteria are met.

Some payments such as Parenting Payment and Family Tax Benefit also have a requirement which means that the portability period is not reset until the person has returned to Australia for a period of 13 weeks. This return period will also be reduced to six weeks.

This measure affects the following payments and benefits: Disability Support Pension, Parenting Payment, Carer Payment, Carer Allowance, Widow B Pension, Wife pension, Widow Allowance, Partner Allowance, Youth Allowance (student), Austudy, Mobility Allowance, Telephone Allowance, Pension Supplement, Utilities Allowance, Seniors Supplement, Clean Energy Supplement, Low Income Supplement, Concession Cards, Family Assistance, and Paid Parental Leave. Family Tax Benefit Part A payments above the base rate will be reduced to the base rate after 6 weeks of a temporary absence from Australia.

Parenting Payment – tightening of eligibility for grandfathered recipients

Effective from 1 January 2013

Currently, recipients of Parenting Payment (PP) who were granted the payment prior to 1 July 2006 do not lose eligibility until their youngest child attains age 16. The Government will align PP eligibility for all recipients so that the payment will cease when the youngest child attains age 6 (for partnered recipients), or age 8 (for single recipients).

Recipients who cease to be eligible for PP will transition to Newstart Allowance (NSA) unless they move into paid employment. This will result in the more onerous activity test associated with NSA, and for single parents:

A reduction in the payment rate, and a more generous income test taper compared to other recipients of NSA (40 cents rather than 50 cents) for every dollar of income earned above the income-free area (currently $62 per fortnight)

Aged Care measures

Means testing

From 1 July 2014, a new income test will be introduced for Home Care packages. Under these arrangements, full pensioners will not pay any income-tested care fee, while part-pensioners will contribute up to a maximum of $5,000 a year, and self-funded retirees up to $10,000 a year, for their care. Care recipients will continue to pay a basic fee of up to 17.5% of the basic Age Pension.

From 1 July 2014, income and assets tests will be combined to strengthen the means testing arrangements that currently apply to residential care. An annual cap of $25,000 will apply to care contributions in residential care. Care recipients will continue to pay a basic fee, currently up to 84% of the basic Age Pension.

Aged care recipients will not contribute more than the cost of their care. In addition, a lifetime cap of $60,000 will be applied to both home care and residential care contributions. The lifetime and annual caps will be indexed. Residents in permanent care in an aged care home as at 30 June 2014 and all respite residents will not be affected by these changes.

Few details have been provided on how this new test will apply but it appears that aged care fees will increase for part pensioners and self-funded retirees. However, as income will continue to be assessed under Centrelink rules, annuity strategies will still be relevant to minimise fees.

Accommodation supplement

From 1 July 2014, for aged care homes that are newly built or significantly refurbished from 20 April 2012, the maximum rate of the accommodation supplement will be increased from $32.58 to $50.00 a day (in current prices). In addition, all residents entering permanent residential aged care from 1 July 2014 will have the choice to pay for their  accommodation through a fully refundable lump sum payment, periodic payments, or a combination thereof.

Providers of residential aged care services will be required to insure any accommodation bonds that they hold for residents entering care on or after 1 July 2014.

A capped number of aged care places that will allow residents to purchase higher level amenities and hotel-type services will be released. The Government component of the extra services fee will be abolished for residents who enter care after 1 July 2014.