The following is an analysis of the Federal Government’s 2012/13 Budget, delivered on 8 May 2012.

It is important to remember that this material relates merely to proposals which have not yet been legislated, and that all of our recommendations contained here should be viewed in that context. We do not recommend you take any specific action until the Government provides greater detail in any relevant draft legislation.

TAXATION

DISCARDED MEASURES

The Budget confirmed that several previously announced measures would no longer be proceeding. The measures which have been dropped are as follows:

• cuts to company tax – this means that the company tax rate will remain at 30%, irrespective of the size of the company.
• 50% tax discount for interest income – this measure was due to commence on 1 July 2013, which now means that all interest income will continue to be taxable in the hands of the recipient.
• standard deduction for work-related expenses – this measure was also due to commence on 1 July 2013, but has now been dropped (apparently due to the tripling of the tax-free threshold to $18,200, which means that a substantial number of individuals will no longer be required to pay income tax in any case).

EMPLOYMENT TERMINATION PAYMENT

The current treatment of an employment termination payment (ETP) means that the tax payable on such payments can be reduced, including where remuneration packages include payments that aren’t related to genuine hardship eg ‘golden handshakes’.

The Budget proposes to limit such tax concessions by ensuring that, from 1 July 2012, they are only available to that part of an affected ETP that takes an individual’s total annual taxable income (including the ETP) to no more than $180,000. Amounts above this level will be taxed at marginal rates. This 'whole-of-income cap' will complement the existing ETP cap ($175,000 in 2012/13, indexed) which ensures that the concessional treatment only applies to amounts up to the ETP cap. This means that ETPs up to the ETP cap are taxed at  maximum rate of 15% for those over preservation age and 30% for those under preservation age (plus Medicare levy).

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.

What this means for you

• If you are entitled to receive an ETP in the near future, you should consider the taxation consequences, particularly where you are  expecting a payment which exceeds $180,000. Although there are no effective strategies to avoid the incidence of taxation on ETPs, other strategies to otherwise reduce taxation may be simultaneously utilised eg making deductible superannuation contributions or deferring the receipt of an ETP to a later more lower income taxed year.

COMPANY LOSS CARRY-BACK

Companies will be allowed to carry-back tax losses, which means that they will be entitled to a refund of tax previously paid.

In particular, a one year loss carry-back will apply in 2012/13, where tax losses incurred in that year can be carriedback and offset against tax paid in 2011/12. For 2013/14 and later years, tax losses can be carried-back and offset against tax paid up to two years earlier. Companies will be able to carry-back up to $1 million of losses each year.

This measure will be available to companies and entities that are taxed like companies eg certain types of unit trusts. It will apply to their revenue losses only and will be limited to their franking account balance.

What this means for you

• As this measure only applies to losses incurred from 1 July 2012 onwards, there are no strategic opportunities for your company where it incurred losses before then. This measure merely presents an opportunity to prospectively monitor your company’s circumstances and ensure that its tax planning is optimal.

MEANS-TESTING THE NET MEDICAL EXPENSES TAX OFFSET (NMETO)

The Government proposes to introduce means-testing for the NMETO. Net medical expenses are the amount of total medical expenses paid by an individual in a financial year, less any relevant amounts received from Medicare/private health insurance.

Currently, individuals with net medical expenses over $2,060 in a financial year are entitled to a tax offset of 20% of qualifying net medical expenses (eg payments to chemists, dentists, doctors, optometrists, as well as residential aged care fees).

From 1 July 2012, persons with adjusted taxable income* above the Medicare levy surcharge thresholds ($84,000 for singles and $168,000 for couples or families in 2012/13) will only be entitled to a tax offset of 10% on qualifying net medical expenses over $5,000. Those individuals with an adjusted taxable income below the surcharge thresholds will be unaffected.

*Adjusted taxable income includes taxable income + adjusted fringe benefits amount + tax-free pensions or benefits + target foreign income + reportable super contributions + total net investment loss less deductible child maintenance expenditure.

What this means for you

• If you are currently availing yourself of the NMETO you may see a reduction in the tax offset available, with a corresponding (albeit marginal) increase in your personal income tax.

BAD DEBTS BETWEEN RELATED ENTITIES

Currently, bad debt write-offs are disallowed for tax consolidated groups. From Budget night, deductions for bad debt write-offs occurring between related parties will be disallowed. This measure will also ensure that the gain to the debtor will not be taxed.

What this means for you

• Although this measure limits the availability of bad debt deductions, such remain a valid end-of-year taxation strategy ie where relevant for you or your business, you can still benefit from writing-off/forgiving debts, in order to reduce associated tax liabilities.

REFORM OF LIVING AWAY FROM HOME ALLOWANCE (LAFHA)

This measure is designed to prevent employers from being able to make tax-concessional payments to employees who either aren’t actually maintaining a second home, or who may be misusing the rules in order to maintain two homes indefinitely.

The proposed changes will:

• limit LAFHA for those employees who maintain a home for their own use in Australia and which they are living away from because of their work, and
• cap the ability to receive LAFHA to a maximum period of 12 months in respect of an individual employee, for any particular work location.

These reforms will apply from 1 July 2012 for LAFHA arrangements entered into after 8 May 2012, and from 1 July 2014 for arrangements entered into prior to Budget night.

Importantly, this measure will not affect:

• existing tax concessions available for ‘fly-in fly-out’ arrangements, and
• the existing tax treatment of travel and meal allowances (frequently known as ‘per diems’), which are provided to employees who have to travel away from their usual place of work for up to three weeks at any given time.

If you are currently receiving LAFHA benefits from your employer you will continue to receive such concessionally, until 30 June 2014. After that date, if you maintain a home for your own use within Australia and you live away from this residence in order to work, you will no longer be able to receive LAFHA beyond a 12-month period where you remain in the one working location.

What this means for you

• If you are currently negotiating relevant remuneration matters with your employer, you maintain a home for your own use in Australia and were hoping to receive a LAFHA benefit you will be unable to do so. As such, you should re-consider your remuneration negotiations in light of this Budget measure.

NON-RESIDENTS WILL NO LONGER BE ELIGIBLE FOR THE CGT DISCOUNT

Capital gains derived on assets disposed of by non-residents, which they had held for greater than 12 months, will no longer receive a 50% capital gains tax discount. In order to access the discount on gains derived prior to 8 May 2012, a market valuation of assets will need to be obtained to determine how much of the gain may be discounted.

What this means for you

• If you are a non-resident and you hold Taxable Australian Property (typically real property located in Australia), you should obtain an assessment of its value as at 8 May 2012, in order to receive a discount on capital gains accrued up to this time.
• Where you anticipate becoming a non-resident, you may benefit from reviewing the tax implications of owning Taxable Australian Property within your portfolio, as opposed to other assets.

PERSONAL INCOME TAX CHANGES FOR NON-RESIDENTS

The Government has confirmed that it will be removing the lowest tax threshold for foreign residents and increasing non-residents in the current and future financial years are as follows:

	2011/12	2012/13	2015/16
$0 - $37,000	29%	32.5%	33%
$37,000 - $80,000	30%	32.5%	33%

 

 

 

 

What this means for you

• Where your other circumstances do not change, where you are a foreign resident earning Australian-sourced  income, you should expect an increase in your tax liabilities for the 2013 and future tax years.

EDUCATION TAX REFUND TO BE REPLACED

From 1 July 2013, the Government proposes to replace the current Education Tax refund (ETR) with a new cash payment known as the Schoolkids Bonus.

What this means for you

• Families in receipt of Family Tax Benefit A and certain other income support payments will be eligible to receive $410 per annum for each child in primary school and $820 per annum for each child in secondary school. The payment is more generous than the current scheme which entitles claimants to a maximum tax refund of $397 for each primary school child and $794 for each secondary school child. In addition the new payment will save parents from having to retain education receipts.
• As a transitional arrangement, for the ETR for 2011/12 will be paid to all eligible families as a lump-sum payment in June 2012.

BROADENING EXEMPTIONS FOR CERTAIN COMPENSATION PAYMENTS AND INSURANCE
POLICIES

The Government has made provisions for minor extensions to capital gains tax exemptions for certain compensation payments and insurance policies. The policy will ensure that those who receive compensation and insurance payments indirectly through trusts are provided the same tax treatment as those receiving such proceeds directly. It has been proposed that the provision be effective from the 2005/06 income year.

What this means for you

• Where you were previously charged with capital gains tax on compensation payments and insurance policies, you will now have the opportunity to amend previous tax returns. The provision is also designed to ensure that capital gains tax-exempt insurance policies held by superannuation funds held prior to 2011/12 will continue to be exempt.

SUPERANNUATION

DEFERRAL OF HIGHER CONCESSIONAL CONTRIBUTIONS CAP

The proposal to allow individuals aged 50 and over with superannuation balances below $500,000 to make $50,000 of concessional contributions each year, which was initially proposed to commence on 1 July 2012, has been deferred to 1 July 2014.

What this means for you

The two-year deferral period for the commencement means that, for 2012/13 and 2013/14, you will be able to make concessional contributions of up to $25,000 each year as permitted under the general concessional contributions cap. In 2014-15, the general concessional contributions cap is likely to increase to $30,000 through indexation, and the higher cap would then commence at $55,000.

• If you are seeking to make greater superannuation contributions (ie in excess of $25,000) you will need to undertake alternate strategies, such as making non-concessional contributions. Additionally, where you were wishing to boost your superannuation savings (and it is appropriate for your circumstances to do so) you may also consider undertaking a superannuation borrowing arrangement, which remain unaffected by the Budget measures.
• You should also review any existing salary sacrifice arrangements or arrangements whereby you receive Superannuation Guarantee contributions from multiple employers, in order to ensure that they do not breach the concessional contributions cap.

INCREASE IN CONTRIBUTIONS TAX FOR HIGH INCOME EARNERS

Presently, a 15% contributions tax on concessional contributions exists for all individuals. This provides higherearning individuals with a significantly higher tax concession than lower-earning individuals. This measure proposes that, from 1 July 2012, individuals with income greater than $300,000 will have the tax concession on their contributions taxed at 30% rather than 15% (excluding the Medicare levy). Importantly, the definition of ‘income’ for the purpose of this measure includes concessional superannuation contributions.

What this means for you

• If your income (excluding concessional contributions) is less than the $300,000 threshold, but the inclusion of their concessional contributions or notional employer contributions (where you are a member of a defined benefit fund) pushes you over the threshold, the increased tax rate will only apply to that part of the contributions that is in excess of the threshold.
• For example, Bob has earned total salary income of $290,000 during the year and has no deductions. His superannuation fund has also received a total of $25,000 in concessional superannuation contributions in respect of him (which are a combination of salary sacrifice and Superannuation Guarantee amounts). The contributions tax payable on these amounts will be $6,000 ( ie. 15% x $10,000 + 30% x $15,000).
• Importantly, this measure will not apply to concessional contributions which exceed the concessional contributions cap and are, therefore, subject to ‘excess contributions tax’. In any case, such contributions are taxed at the highest marginal tax rate and, for this reason, will not be eligible for any taxation concessions contemplated in this measure.
• At this time, it is not clear as to how this measure will be administered, ie. whether the liability for the additional contributions tax will be payable by the relevant individual or the superannuation fund.

AGED CARE

AGED CARE REFORMS

Further to announcements made in April this year, the Government has proposed major reforms to the structure and funding of aged care services, which, if adopted, will have an impact on both the recipients and providers of services.

Some of the major changes proposed include:

• more options to enable aged individuals the ability to receive home-based care, negating the need for them to move into an aged care facility
• broader means testing of aged care fees, due to the Government's increasing focus on developing a 'user-pays' philosophy towards aged care services
• a new Government body, which will approve the level of lump sum bond payments (or equivalent periodic payments) applicable for each facility
• one care level, replacing the current classifications of 'high-level' and 'low-level' care, and
• changes to the means testing rules which apply to individuals seeking to access aged care services.

Where individuals are already in an aged care facility as of 30 June 2014, their prevailing fee arrangements will apply under grandfathering provisions.

What this means for you

• It is important to note that all of the above items are merely proposals and not legislated changes at this stage. If adopted, the earliest that any of the changes will begin to have operation is 1 July 2013. This means that there are no changes to the current laws, with the result that any existing strategies we have recommended to you for the funding of aged care services remain valid for the time being.