Federal Budget Review 2012
The Budget has targeted mid to high income earners by reducing various tax concessions in order to fund other initiatives.
We have summarised below the key points we believe clients of APW Partners should be aware of in last night’s Budget:
The government plans on the budget moving from a $44bn deficit this year to a $1.5bn surplus next year. It is a largely engineered number as previously announced expenditure programs have been either deferred or cancelled. Treasury has assumed the economy will grow by 3.25% in 2012-13 and 3% in 2013-14.
From an investment market perspective, the budget is quite benign.
♦ Superannuation Contributions
As expected, for people with taxable income over $300,000, their contributions to superannuation will be taxed at 30% rather than 15%. This will affect around 128,000 people and raise at most $480M. Note this definition will include current tax exempt pension income.
The proposal for people aged over 50 with a super balance below $500,000 to be able to make annual concessional contributions of $50,000 has been deferred. For the next two financial years, everyone will be limited to $25,000 of concessional super contributions. By 1 July 2014, the impact of indexation should see the $25,000 cap lifted to $30,000.
These measures undermine confidence in our retirement system. The costs of implementing and administering this ‘tinkering’ to both government and the superannuation industry will be enormous and given the timing, it will take at least 12 months for any additional revenue to been seen. The simplicity of the system introduced under Costello is slowly being weakened.
♦ Companies can carry back losses
Currently businesses are able to carry forward losses to offset future profits and therefore reduce their tax bills. The new measure will allow businesses to ‘carry back’ their losses, applying them to the tax they previously paid, and receive a refund on some of that tax paid.
The amount of losses that can be carried back is capped at $1M and the available tax benefit is limited to the amount of the company’s franking account balance. More details are yet to be announced.
♦ Small business asset write offs
From 1 July 2012, small businesses can immediately write off the cost of new assets less than $6,500. They can also claim the first $5,000 of any motor vehicle purchased.
♦ Personal Tax Rates
The Flood Levy ceases on 1 July 2012. With the low income tax offset, individuals can have taxable income of up to $19,404 and pay no tax. Non-residents now lose the 50% capital gains tax discount on taxable real Australian property. There are also small changes to non-resident tax rates:
♦ Superannuation Pension payments
For next financial year, minimum pension amounts will still be reduced by 25% to help retirees preserve capital after the GFC. For a person under 65 years of age, the minimum pension payment next year will be 3%. For those aged 65 to 74, the amount will be 3.75%.
♦ Family Trust distributions
Family trusts can still only distribute $416 to minor’s tax free.
♦ Franked Income
If your only source of taxable income was franked dividends, you could receive $99,260 in cash payments next year and pay no tax (due to the franking rebates).
♦ Medical expenses offset
From 1 July 2012, access to the offset for 20% of net medical expenses over $2,000 is to be means tested for taxpayers with income above $84,000 (individuals) or $168,000 (couples and families). In addition, net expenses must now be over $5,000 and then only 10% will be rebated.
♦ Means testing for aged care
Income and assets tests will be combined from 1 July 2014 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. 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.
♦ National Disability Insurance Scheme
The Government will commit $1bn over four years to the first stage of a National Disability Insurance Scheme. The first stage will deliver personalised care and support for up to 10,000 people with significant and permanent disability from 2013-14 and expand to support up to 20,000 people from 2014-15.
♦ Employment Termination Payments
From 1 July 2012, the existing concessional tax treatment of ‘golden handshakes’ will be limited, with the payment simply added to a person’s taxable income.
♦ Scrapped measures
Some previously Budget announcements have been scrapped, including the reduction in the corporate tax rate from 30% to 29% and a 50% discount on interest income for individuals.
♦ Significant deferral/reduction of payments including foreign aid and defence have been “engineered” to provide the target $1.5bn surplus.
Our Treasury knows that our current aged welfare system is unsustainable. Within a generation, people are going to need to be either financially self-sufficient, work longer or spend less. Unfortunately, encouraging people to embrace this reality and importantly stimulating economic growth was overlooked in last night’s Federal Budget, with an (unlikely) re-election front of mind.
Author: Rick Walker
Note: This material is provided for information only. No account has been taken of the objectives, financial situation or needs of any particular person or entity. Accordingly, to the extent that this material may constitute general financial product advice, investors should, before acting on the advice, consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation and needs. This is not an offer or recommendation to buy or sell securities or other financial products, nor a solicitation for deposits or other business, whether directly or indirectly.