Federal Budget 2012/13: Key Issues and Implications

Written by Kate McCallum, Multiforte

Superannuation

Higher tax on concessional contributions for very high income earners from 1 July 2012

The Government proposes that individuals with income greater than $300,000 will have the tax concession on their concessional contributions reduced by 15%. That is, these higher income earners will be subject to a 30% rate of tax on concessional contributions (within the cap) rather than the 15% rate.

Details on exactly how this measure will operate (such as whether it means a dual-rate contributions tax (ie 15% and 30%), a super surcharge-like mechanism or an extension to the excess contributions tax assessment and collection process) have not been provided, other than the following:

• 'Income' means taxable income, concessional super contributions, adjusted fringe benefits, net investment loss, target foreign income, tax-free government pensions and benefits, less child support.
• If concessional contributions themselves push a person over the $300,000 limit, the higher rate of tax will only apply to the part of the contributions that are in excess of the threshold.
• 'Concessional contributions' means all employer contributions (both SG and salary sacrifice), deductible personal contributions and notional employer contributions for defined benefit members.
• Excess concessional contributions will only be subject to excess contributions tax (31.5%) not the additional 15% tax. This will ensure a maximum tax rate of 46.5% is applied to the excess portion of an excess concessional contribution instead of 61.5%.

Implications

The overall impact of this measure will be to increase the tax burden by up to $3,750 (i.e. 15% of $25,000) on concessional contributions made by very high income earning clients.

Potential winners are those clients on the highest marginal tax rate but who will not be subject to additional tax on super contributions. This includes those on incomes between $180,000 and $299,999 who pay a marginal tax rate of 46.5% but are still eligible for the 15% tax for concessional super contributions.

As a result of this measure, very high income earners may wish to reconsider other investment structures, including companies and trusts.

Deferral of higher concessional contributions cap from 1 July 2012

The general $25,000 concessional cap will apply to all individuals from 1 July 2012 to 30 June 2014.

The Government proposal to provide a higher concessional cap for individuals age 50 and over with super balances below $500,000 will be deferred until 1 July 2014.

It is important to note that the Government also intends to pause indexation of the general concessional cap until 1 July 2014. This means that the general cap is likely to increase to $30,000 in 2014/15 with the higher cap commencing at $55,000.

Implications

With the reduced cap, there is a greater risk of inadvertently breaching the $25,000 limit - particularly when you consider that this includes super guarantee contributions on your salary and bonus. It will be critical to revise salary sacrifice and other concessional contribution arrangements for the 2012-13 and 2013-14 financial years.

Lower concessional caps will reduce the tax-effectiveness of super contributions strategies for clients aged 50 or more who were intending to maximise the $50,000 cap. For example, if you were planning to salary sacrifice $50,000 and can now only salary sacrifice $25,000, at a marginal tax rate of 38.5%, you will pay additional tax over the next two years of $11,750.

For individuals using transition to retirement (TTR) strategies, it remains an effective strategy. However its benefits are reduced depending on your income, tax rate, and superannuation components. This is a complex area and if you wish to review your strategies, we encourage you to obtain professional advice.

For businesses

Company loss carry-back

Companies will be allowed to 'carry back' their tax losses so they receive a refund against tax previously paid. Currently, businesses are only able to carry forward their tax losses to offset future profits and reduce future tax liabilities.

From 1 July 2012, companies will be able to carry back up to $1 million worth of losses to get a refund of tax paid in the previous year. From 1 July 2013, companies will be able to carry back up to $1 million worth of losses against tax paid up to two years earlier.

This will be available to companies and entities that are taxed like companies and apply to their revenue losses only. The government will release a discussion paper on this measure shortly.

Implications

As a business, if you make a loss in the period after 1 July 2013, you could apply this against prior year profits. Businesses could receive a cash benefit of up to $300,000 a year.

Business instant write-off

From 1 July 2012, small business will be able to immediately deduct the cost of any new business asset costing less than $6,500 for as many assets as they purchase. Businesses will also be able to write-off assets costing $6,500 or more in a single pool (15% in the year they are purchased and 30% in each subsequent year).

Company tax cut

The proposed measure to lower the company tax rate from 2013-14 (to 29%) and to implement an early start to the company tax rate cut from 2012-13 (to 28%) for small business will not proceed. The Government has been unable to progress this measure through the Parliament and will direct some of the savings to a loss carry back arrangement for companies.

Other tax matters

There are a range of tax changes which are likely to impact non-residents (eg. change to tax rates, removal of capital gains tax discount) and people eligible for Family Tax Benefit A and B (eg. Education tax refund).

For higher income earners, the net medical expenses tax offset is to be means tested, and for mature age workers, the tax offset is to be phased out.

In this 2012 Budget, the Government has advised that it will not implement several measures previously announced, including the standard tax deduction of $1,000 for work-related expenses and the cost of managing tax affairs, and the 50% discount for the first $1,000 of interest income.