The Federal Government has released the 2013/14 Federal Budget with a number of measures proposed in an attempt to increase government revenue to bring federal finances back to surplus in the coming years. This budget seems to signal the end (at least in the short term) of annual taxation concessions to the wider public, with a number of proposals increasing the expected tax that individuals will be liable for next financial year and beyond.
Increase to the Medicare Levy
To support the introduction of the National Disability Insurance Scheme (a.k.a. DisabilityCare) the 2013/14 Federal Budget has announced an increase to the Medicare Levy from 1.5% to 2% starting the 1st July 2014. Although Medicare concessions still apply for low income earners, an individual on an average income could expect to pay an extra $360 in Medicare Levy1.
The increase in taxation paid through a higher Medicare Levy is not limited to income and will also indirectly increase the taxation paid on a number of other benefits including fringe benefits tax, withholding tax and tax on superannuation lump sum benefits paid up to the age of 59.
An increase in the Medicare Levy is not all bad news. A higher Medicare Levy will make some strategies more effective. For example, there will now be a bigger tax difference (saving) for superannuation contributions, with the lowest marginal tax rate (above $18,200) being 21% up to 47% while the tax deductible superannuation contributions will continue to be taxed at 15% (for incomes under $300,000).
This year’s Federal Budget announced the highly popular Baby Bonus will be abolished from the 1st March 2014. In lieu of this payment, Family Tax Benefit A will be increased with an additional payment of up to $2,000 (1st child) or $1,000 (subsequent children). This increase is partially offset by the withdrawal of the expected increase to the Family Tax Benefit A announced last year, reducing payments by up to $600. The changes to Family Tax Benefits are a bit of a mixed bag, however overall, eligibility and thresholds have either been tightened or paused.
Superannuation and Retirement
The 2013/14 Federal Budget has affirmed prior announcements relating to superannuation and retirement without any major changes to prior announcements. Included in the budget 2013/14 Federal Budget are;
- Taxation on pension earnings over $100,000. Earnings in account based pensions that exceed $100,000 will be taxed at 15%. The impact of this tax will be dependent on financial year returns and is expected to have a greater administration impact to SMSF’s.
- Increase in the concessional contributions cap to $35,000 (from $25,000). This will provide accumulators a higher cap to contribute into superannuation. This will be available to individuals aged over 60 from 1st July 2013 and for those aged 50 and over the year after.
- Increase in threshold to $2,000 (from $200) for lost superannuation accounts that can be transferred to the ATO.
Of major interest is a proposal by the government for aged pension concessions for a family home to be sold without impact on aged pension entitlements from 1st July 2014. Under the proposal, the government will ‘trial’ a means test exemption where a family home, owned for at least 25 years is sold and at least 80% of the proceeds (max. $200,000) is deposited into a ‘special account.’ There is no clarification on what this special account will be apart from, however to qualify for the exemption; the funds must be maintained in this account for 10 years without withdrawal. Based on information thus far, the exemption will not apply to those downsizing to move into residential aged care.
Although this could provide an effective method of increased the aged pension payable, having funds locked up for 10 years may deter retirees from utilising this benefit. We await further details from the government.
Other Income Tax Measures
As part of the 2013/14 Federal Budget the government has announced a number of other savings measures including;
- Self Education Expenses limited to $2,000 (currently unlimited) per annum from 1st July 2014.
- Net medical expenses tax offset (NMETO). The government is phasing out this offset over a period until 1st July 2019. Those who currently claim this benefit will be able claim this benefit next financial year, however unless the claim is for disability aids or attendant/aged care, this tax offset will no longer be available to individuals who did not claim this year.
- The Higher Education Loan Program (HELP formerly HECS) discount for upfront payments will be abolished from 1st January 2014.
- The government has deferred income tax cuts previously proposed to apply from the 1st July 2015. Without a future date announced, it is currently assumed to be indefinite, with the tax free threshold remaining at $18,200 (rather than increase to $19,400) and the marginal tax rate for incomes between $37,001 and $80,000 remaining at 33% (rather than reduce to 32.5%).
But what about last year’s budget?
There are still a number of budget measures from the 2012/13 Budget yet to be legislated. The Increased Contributions Tax for High Income Earners is an example. Although the intention to legislate has been reaffirmed by the government, no legislation has yet been tabled. Some minor amendments have been proposed to ease the risks to the legislation and it is still expected that the increased tax will be retrospective to 1st July 2012.
A number of measures announced last year, including increases to Family Tax Benefit A have been withdrawn or in the case of the Child Care Benefit indexation pause, extended further.
There are a number of significant announcements in the 2013/14 Federal Budget and announcements that will require careful review of existing financial strategies.
1 AWOTE 2012 December Quarter.
End of Financial Year Planning is best handled by a taxation and/or financial professional. Before acting on any information you need to discuss your situation with your accountant or financial adviser to assess your needs.
About the Author – Benjamin Irons
Benjamin has been involved in the financial services industry since 2004. Benjamin has a Bachelor in Business, Diploma of Financial Services (Financial Planning). Previously a Financial Adviser and a business owner, Benjamin has worked with hundreds of individuals and businesses to implement simple strategies to improve wealth. Benjamin writes for a number of websites to assist people take control of their finances and find their financial freedom!