Henry Tax Review
2 May 2010
The Government has announced the first wave of reforms as a result of the recommendations announced in the ‘Henry Tax Review’. The winners are without doubt the lower income earners with concessions for superannuation and those aged 50 and over with balances less than $500,000 in superannuation. Outlined below is a brief review of the key Government announcements.
Increasing the superannuation guarantee to 12%
The Government has announced that it will increase the superannuation guarantee (SG) rate from 9% to 12%, with increments of 0.25% in the first two years, and 0.5% thereafter. The increase will be phased in from 1 July 2013.
| Financial year |
Superannuation guarantee (%) |
|---|---|
| 2013/14 | 9.25% |
| 2014/15 | 9.5% |
| 2015/16 | 10.0% |
| 2016/17 | 10.5% |
| 2017/18 | 11.0% |
| 2018/19 | 11.5% |
| 2019/20 | 12.0% |
What does this mean?
Superannuation remains the most tax-effective way to save for retirement and this measure will ensure that even those who are unable to make additional contributions to superannuation will benefit from a significant increase in their overall retirement savings.
Superannuation guarantee to be provided to age 75 (up from age 70)
The Government has announced that it will raise the SG age limit from 70 to 75, with effect from 1 July 2013.
What does this mean?
Equality for workers in this age group - a change that is long overdue as only now does it match the age-limit for voluntary and self-employed contributions. Interestingly, around 33,000 employees are expected to benefit from this measure.
Government superannuation contribution for low-income earners
The Government has announced that individuals on adjusted taxable income up to $37,000 will have a 15% matching rate applied to concessional contributions made up to a maximum annual amount of $500.
What does this mean?
Low-income earners can have $3,333 in concessional contributions made to superannuation each year without having their benefits reduced by contributions tax as the $500 payment will offset the contributions tax payable.
A permanent increase in the concessional contribution cap to $50,000 per annum
The Government has announced that the transitional measure (due to expire 30 June 2012) afforded to contributors aged 50 years of age and over should remain permanently for those with account balances less than $500,000.
What does this mean?
The Government has acknowledged that it is quite often not until individuals are in their 50’s before they are in a position to dedicate additional savings to superannuation (when they have paid down the mortgage and the children are no longer financially dependent).
This will provide more certainty in projecting a retirement savings plan and will ensure a combined salary sacrifice/transition to retirement strategy remains an effective means of efficiently building retirement savings in the years just before retirement.
Company taxation
The Government has announced that it will cut the company tax rate to 29% from the 2013/14 financial year. It will then be cut further to 28% from the 2014/15 financial year. In a bid to assist small business companies the Government has announced that they will be eligible for 28% company tax rate from the 2012/13 financial year.
What does this mean?
It is expected that reducing the company tax rate will increase investment and therefore production across all sectors of the economy.
Further, the Government has announced that it will allow small businesses to immediately write-off assets valued at under $5,000, up from $1,000 currently. In addition, small businesses will be able to write-off other assets (except buildings) in a single depreciation pool at a rate of 30%.
What does this mean?
The increased write-off value will effectively increase their cash-flow by deferring their tax liabilities. While the changes to the depreciation rules will reduce compliance costs by removing the requirement to calculate depreciation allowances and track assets for depreciation. Further, it will make asset ownership more attractive than leasing or debt financing.
Introduction of resource super profits tax
The Government has announced that the mining sector will be subject to a new 40% tax on their profits with effect from 1 July 2012 as opposed to the current royalty tax which is volume based rather than profit based. The Government believes that this change is necessary to ensure that non-renewable resources remain available over the long term.
What does this mean?
It is likely that this change will have an impact on expected profitability, at least over the medium term, and may as a result impact the share prices of those companies affected by the changes.
What does the future hold?
There are several other key points that the Henry Review has recommended which many commentators believe will form part of the Government’s election campaign. These include:
- Simpler tax returns. The review has recommended that workers receive a ‘default return from the Australian Taxation Office which the taxpayer would be required to accept.’ However, for this system to work we would need to move away from itemised work deductions in favour of an automatic standard deduction system.
- Increase to tax-free threshold. The review also suggests increasing the personal tax-free threshold to $25,000.
- Tax incentives to encourage saving. The review also proposes a 40% discount on all income from savings, as well as on all residential rental income and losses, and capital gains. It is reasoned that because the current tax treatment is far less generous than the tax treatment of other investments such as shares and property, this encourages investors to take on too much debt.
To view the final report, visit the Treasury website.
