AN ELECTION YEAR BUDGET 2010 - 2011

Despite Government claims to the contrary, and talk of fiscal restraint, this has many of the traditional hallmarks of an election year Budget.

While mining companies and smokers have been hit with tax increases, the final instalment of cuts to personal marginal tax rates announced in the 2008/09 Budget will go ahead, and there is increased spending on health.

From 1 July 2011, the first $1,000 of interest will be taxed at a 50 per cent discount, providing an incentive for increased saving. From 1 July 2012, individual taxpayers will have an optional standard deduction of $500 in lieu of claiming work and taxrelated expenses, increasing to $1,000 from 1 July 2013.

As previously announced, a resources super profits tax will be used to fund the reduction in the company tax rate as well as the superannuation reforms.

Economically, the news is good, with an earlier forecast return to surplus and lower forecasts for unemployment.

FINANCIAL PLANNING IMPLICATIONS

From a financial planning point of view, the impact of the Budget measures is relatively small.

The Government has taken the opportunity to reannounce a number of the measures included in its response to the Henry review, including the permanent higher concessional contributions caps for those aged 50 or over whose total superannuation balance is less than $500,000. Apart from this group, last year’s decision to halve the concessional contributions caps remains. The halving of the accountbased pension minimums for the 2008/09 and 2009/10 financial years has not been extended.

The superannuation guarantee (SG) rate increases to 12 per cent, although only gradually between 2013/14 and 2019/20. The ‘temporary’ reduction in the cocontribution matching rate to 100 per cent is here to stay. However, individuals with income of less than $37,000 will receive additional Government contributions of up to $500 per annum to offset the impact of contributions tax on their concessional contributions.

Many of the measures have a positive impact on low income taxpayers, and advisers focussed on wealth accumulation may need to adjust relevant strategies to maximise benefits for this group of clients. There are also positives for retirees, many of whom have low marginal tax rates due to accountbased pension income being concessionally taxed or tax free. Older Australians who are not using accountbased pensions should continue to be reminded of the benefits of accountbased pension structures to hold assets.

Please note that the changes outlined in this summary are proposals only at this stage, and will not take effect until the passage of relevant legislation.

TAXATION, SUPERANNUATION,SOCIAL SECURITY, OTHER

TAXATION

1. Changes in personal income tax (Proposed start date: 1 July 2010)

Personal income tax rates and thresholds are legislated to change from 1 July 2010. The threshold at which the 30 per cent marginal tax rate begins to apply will increase from $35,001 to $37,001. In addition, the 38 per cent marginal tax rate will decrease to 37 per cent. The following table sets out the rates and thresholds for resident taxpayers for the 2009/10 and 2010/11 and later years.

Different thresholds and rates of tax apply for nonresidents.

The maximum low income tax offset (LITO) will increase from $1,350 to $1,500 per financial year from 1 July 2010. The threshold at which the offset begins to phase out will remain at $30,000. Those eligible for the full LITO will have an effective taxfree threshold of $16,000 in 2010/11.

Implication/comment: These changes provide a tax saving of up to $1,300 per annum, as shown below.

Taxable income Tax payable 2009/10 Indicative tax saving 2010/11

$35,000 $3,725 $150 $55,000 $10,825 $450 $80,000 $19,050 $300 $100,000 $26,950 $500 $150,000 $46,700 $1,000 $200,000 $67,850 $1,300

Note: tax payable includes low income tax offset and Medicare levy

The benefit of gearing and salary sacrifice arrangements may be affected by the changes described above. It may be an opportune time to consider reviewing these arrangements as well as income splitting, deferral of capital gains tax (CGT) events and other advice strategies.

As a result of the changes in tax rates and thresholds from 1 July 2010, effective taxfree thresholds will increase as follows.

Effective taxfree thresholds 2009/10 2010/11

Standard taxfree threshold $15,000 $16,000 Minor – unearned income $3,000 $3,333 Individuals who are aged between preservation age (currently age 55) and age 59

$45,790 $48,158

(inclusive) and receiving all income from a taxable pension Single individuals who have reached Age Pension age or Service Pension age and qualify for senior Australians tax offset (income other than pension income from a $29,867 $30,685 taxed super fund)

Note: all thresholds include low income tax offset, exclude Medicare levy and assume that senior Australians tax offset (SATO) is unchanged.

2. Medicare levy thresholds (Proposed start date: 1 July 2009)

The Medicare levy lowincome threshold will increase to $18,488 (up from $17,794) for singles, and to $31,196 (up from $30,025) for couples. This means that singles or couples with incomes in the 2009/10 financial year below these new thresholds will be exempt from the Medicare levy. For families, the additional amount of threshold for each dependent child or student will also be increased to $2,865 (up from $2,757).

The Medicare levy lowincome threshold for pensioners below Age Pension age will also be increased to $27,697 (up from $25,299) for the 2009/10 financial year. This means that a pensioner below Age Pension age with an income in 2009/10 below this new threshold will be exempt from the Medicare levy.

3. Net medical expenses tax offset (Proposed start date: 1 July 2010)

The Government will increase the threshold above which a taxpayer may claim the net medical expenses tax offset from $1,500 to $2,000 and commence annually indexing the threshold to the Consumer Price Index. The first indexation adjustment to the threshold will take place on 1 July 2011.

Implication/comment: The net medical expenses tax offset currently allows taxpayers to receive a tax offset equal to 20 per cent of net unreimbursed eligible medical expenses above $1,500.

4. Standard tax deduction (Proposed start date: 1 July 2012 and 1 July 2013)

The Government will provide individual taxpayers with a standard deduction of $500 for workrelated expenses and the cost of managing tax affairs from 1 July 2012. From 1 July 2013 the Government will increase the standard deduction to $1,000. Those taxpayers with deductible expenses greater than the standard deduction amount will still be able to claim their higher expenses, rather than claiming the standard deduction amount.

Implication/comment: The standard deduction will reduce individuals’ and families’ adjusted taxable income (ATI) for the purpose of determining their eligibility for social security payments and other concessions. This will make some individuals and families eligible for payments or eligible for a larger payment.

This primarily affects Family Tax Benefit (FTB), but will also affect other payments such as the Baby Bonus, Child Care Benefit, Commonwealth Seniors Health Card (CSHC) and the Seniors Supplement (which is linked to eligibility for the CSHC).

5. Discount tax on interest income (Proposed start date: 1 July 2011)

The Government will provide a 50 per cent tax discount on up to $1,000 of interest earned by individuals, including interest earned on deposits held in authorised deposit taking institutions, bonds, debentures and annuity products. The discount will be available for interest income earned directly as well as indirectly, such as via a trust or managed investment scheme.

Implication/comment: An individual on a 30 per cent marginal tax rate will derive a direct benefit of approximately $157 and approximately $232 for an individual on the top marginal tax rate.

Taxpayers claiming the discount for interest income will have a reduced adjusted taxable income for the purpose of determining eligibility for social security payments and other concessions. This will result in some individuals and families becoming eligible for payments or eligible for a larger payment. This primarily affects Family Tax Benefit, but will also affect other payments such as the Baby Bonus, Child Care Benefit, Education Tax Refund, CSHC and the Pensioner Supplement (which is linked to eligibility for the CSHC).

This measure may lead to increased use of annuities and bank account style products. However, given that the discount will apply if the interest is earned directly or indirectly (eg a fixed interest distribution from an individual’s investment in a balanced managed fund) then it is unlikely to have a substantial impact. Some changes in asset allocations (increased exposure to fixed interest) for certain high marginal tax rate taxpayers may be sensible.

6. Company tax rate (Proposed start date: various)

The company tax rate will be reduced from 30 per cent to 29 per cent for the 2013/14 financial year and to 28 per cent from the 2014/15 financial year.

The Government will cut the company tax rate for eligible small business companies to 28 per cent from the 2012/13 financial year. As a result, small business companies will have a lower tax rate than other companies until the reduction in the general company tax rate to 28 per cent in 2014/15.

7. Writeoff of small business assets (Proposed start date: 1 July 2012)

The Government will allow small businesses to immediately write off all assets costing less than $5,000 and will allow most other assets (not including buildings) to be depreciated in a single pool at a 30 per cent rate.

Implication/comment: This is an improvement on the existing depreciation concessions available to small businesses, which currently limit writeoffs to assets which cost less than $1,000.

8. Resources super profits tax (Proposed start date: 1 July 2012)

The Government will introduce a resource super profits tax (RSPT), payable at a rate of 40 per cent on the profits attributable to the exploitation of nonrenewable resource deposits, with the exception of projects within the scope of the Petroleum Resource Rent Tax for which optin arrangements will be developed in consultation with industry.

9. Income tax treatment of instalment warrants (Proposed start date: 1 July 2007)

The income tax treatment of qualifying instalment warrants will be amended to provide certainty for investors by treating them as the owner of the underlying asset for income tax purposes.

Implication/comment: This provides greater certainty for investors using instalment warrants. It also ensures that the opportunity for nonrecourse borrowing by trustees of superannuation funds permitted under prudential regulations is not undermined by its tax treatment.

10. Capital protected borrowings — change to benchmark interest rate (Proposed start date: 7.30pm 13 May 2008)

The Government will adjust the benchmark interest rate that applies to capital protected borrowings to the Reserve Bank of Australia (RBA) indicator rate for standard variable housing loans plus 100 basis points, instead of the RBA indicator rate for standard variable housing loans as announced in the 2008/09 Federal Budget.

The Government will also extend the transitional arrangements for capital protected borrowings entered into at or before 7:30 pm (AEST) 13 May 2008 from the announced date of 13 May 2013 to 30 June 2013, to reduce compliance costs for affected taxpayers.

Implication/comment: The change will allow borrowers to effectively obtain a higher deduction.

11. Managed investment trusts – new tax system (Proposed start date: 1 July 2011)

The Government announced a new tax system for managed investment trusts (MITs) in its response to the Board of Taxation review.

An elective ‘attribution’ system of taxation is to replace the current system of present entitlement. The new system provides that investors will be taxed only on the income that the trustee allocates to them on a fair and reasonable basis, consistent with their entitlements under the trust deed or the trust’s constituent documents. Under the present arrangement, trust beneficiaries may be taxed on amounts that they are not entitled to receive and trustees may be taxed on capital gains that they have already distributed to investors.

Qualifying MITs will be deemed to be fixed trusts for various taxation law purposes. A carryover facility will be established to deal with ‘over or under’ distributions within a five per cent cap.

Implication/comment: This is a positive outcome for MIT providers and investors as trusts are not required to reissue tax statements and investors are not required to revisit tax returns.

The measure removes double taxation by allowing upward cost base adjustments to the CGT cost base of an investor’s interest in the trust. Double taxation can arise where the taxable income of an MIT differs from the amount distributed to beneficiaries. The trust distributions can exceed the net income of the trust due to either timing or other reasons. This is a reasonably wide problem and its effect is often hidden from trust beneficiaries because it is ‘net within the trust’.

12. Managed investment trusts capital account treatment (Proposed start date: 1 July 2008)

The Government will refine measures to allow an MIT to elect to have the CGT regime as the primary code for taxing gains and losses on the disposal of key investments. This includes expanding the definition of an MIT to ensure that a broader range of widely held trusts are able to make an election, and expanding the scope of eligible assets.

Futuro Financial Services Pty Ltd wishes to acknowledge and thank AXA Australia for providing content for the preparation of this document.