The month of May has arrived again and with it comes another federal budget. This budget was heralded as the toughest yet to be delivered by Treasurer Wayne Swan and would finally deliver the return to surplus his government has been promising for several years.
We were told to expect harsh spending cuts and tough decisions in the lead up to this budget as the government sought to turn around last years $44 billion deficit to a surplus. What has resulted however is more of an exercise in creative accounting and the undoing of previous announcements rather than the doom and gloom threatened by the treasurer.
Normally, budgets set out the long term policy agenda of the sitting government and are used to deliver structural changes to the economy. The politics behind this budget however are so precarious that any large scale structural changes were never going to be handed down this May. The current government is crippled with near record levels of unpopularity, constant leadership rumblings and almost daily threats to its paper thin margin within parliament. The sole aim of this budget it would appear has been to get to a surplus by putting the fewest people offside as possible.
Whilst no major reforms have been announced, in amongst this year’s budget are some additional costs to high income earners, good and bad news for businesses, cash splashes for families and the inevitable tinkering around the edges of our tax system.
The following summary attempts to explain these changes and how they may affect you.
The Budget – A high level view
The 2012-13 federal budget is based on the following economic assumptions:
- Total revenues of $369 billion
- A cash surplus of $1.5 billion
- Predicted economic growth of 3.25%
- Unemployment 5.5%
- Consumer Price Index (Inflation) 3.25%
Small Business Tax Changes
- The proposed reduction in the company tax rate to 29% has been scrapped altogether. The current company tax rate will remain at 30% indefinitely.
- Loss Roll back provisions will be introduced from 1 July 2012 for small business. Currently, a business making a taxable loss can only offset that loss against future profits. This new scheme will now allow a current year loss of up to $1,000,000 to be applied backwards against prior year profits resulting in potential refunds of tax paid in prior years. Ultimately, this is a timing issue and will provide tax relief to small businesses within the year they make a loss (rather than waiting for a future profit). This carry-back will only be applied to companies, businesses operating within a trust, a partnership or as a Sole Trader will not be able to roll back losses.
- As announced previously, there are changes to the way the tax free threshold and low income rebate applies to minors receiving unearned income e.g. distributions from a discretionary family trust from 1 July 2012. Previously minors could receive up to $3,336 with no tax payable. This effective threshold will fall to $416.
- The previously announced changes to small business depreciation will proceed. From 1 July 2012 onward, small businesses (less than $2million annual turnover) will be able to immediately write off assets costing $6,500 or less. An additional $5,000 immediate deduction will also be available for the cost of a new vehicle (in addition to normal depreciation) from 1 July 2012.
- The government has continued its winding back of Living Away From Home (LAFH) benefits by limiting access to the tax concession to employees who maintain a home for their own use in Australia, that they are living away from for work; and providing the tax concession for a maximum period of 12 months in respect of an individual employee for any particular work location.
Superannuation Changes
- The planned higher cap for Concessional Contribution (i.e. those contributions for which you or your employer can claim a tax deduction) caps for individuals aged 50 and over with superannuation balances below $500,000 will be deferred from 1 July 2012 to 1 July 2014. This effectively means that all taxpayers, regardless of their age, will have a concessional cap for the 2012-13 tax year of $25,000 only. This measure will have significant effect for salary sacrifice arrangements, deductions for personal contributions, year end tax planning, transition to retirement pensions etc.
- From 1 July 2012, individuals with an income greater than $300,000 will be taxed at 30% on concessional superannuation contributions rather than the current rate of 15%. There are few details available at this stage as to how this system will work. Obvious complexities arise in the definition of ‘income’, the timing of payments and the treatment of defined benefit funds.
Personal Tax Changes
- The proposed 50% tax discount on interest income has been scrapped. Interest income will continue to be taxed as normal assessable income.
- The proposed simplification of Income Tax Returns by allowing standard deductions has been scrapped. Tax returns will continue in their current form for the foreseeable future.
- There was no change to the previously legislated personal income tax rates which from 1 July 2012 will move as follows:
2011-12 2012-13 Threshold Rate Threshold Rate 1st rate $6,001 15.00% $18,201 19.00% 2nd rate $37,001 30.00% $37,001 32.50% 3rd rate $80,001 37.00% $80,001 37.00% 4th rate $180,001 45.00% $180,001 45.00% - Higher tax rates will apply to non-residents from 1 July 2012 as follows:
Taxable income $ Tax payable $ 0 – 80,000 32.5% 80,001 – 180,000 37% 180,001+ 45% - Non residents will also no longer be able to claim the 50% capital gains discount effective immediately.
- The Education Tax Rebate will be replaced by an automatic and ‘no strings’ offset called the Schoolkids Bonus. Previously, eligible parents were required to provide receipts for school related expenditure before they could receive the offset. Starting January 2013, payments of $410 for primary school students and $820 for secondary school student per year will be paid directly to families in two equal instalments (each January and July). No claims will need to be made through your tax return.
- Limits on tax concessions for ‘golden handshake’ payments. Previously, a tax offset applied to an eligible termination payments (ETP) which limited tax payable on the ETP to 30%, regardless of the individuals income and or tax rate. From 1 July 2012, only that portion of the ETP which brings the individuals annual income to $180,000 will be eligible for the offset. The balance will be taxed at marginal rates (46.5%).
- Several different dependant offsets (invalid spouse and carer spouse, housekeeper, child-housekeeper, invalid relative offset and parent/parent-in-law offset) will combined into a single offset.
- The Family Tax Benefit Part A will increase (though not until 1 July 2013) by $300 for families with one child and by $600 for families with 2 or more children.
- The mature age worker offset will begin phasing out from 1 July 2012 for taxpayers born on or after 1 July 1957. Access to this benefit will continue for workers aged 55 or older in 2011-2012.
- The net medical expenses offset will be means tested from 1 July 2012 onward. A rebate of 20% currently applies to out of pocket expenses over $2,000. For singles earning $84,000 and couples earning $168,000, this threshold will increase to $5,000 and only a 10% rebate will apply.