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Financial FoundationsAustralia Pty Ltd Financial Foundations Australia Pty Ltd, Australian Financial Services Licence No: 237439

ABN 56 006 829 11649 Robinson St, Dandenong VIC 3175, Ph: (03) 9793 3722 Freecall: 1800 818 197 Fax: (03) 9793 5664

Email: [email protected] Web: www.financialfoundations.com.au

Vol. 26 May 2011

w w w . f i n a n c i a l f o u n d a t i o n s . c o m . a u

BUDGET REPORTProviding financial advice for over 24 years

Treasurer Wayne Swan delivered his fourth Federal Budget on Tuesday 10 May 2011, describing it as a “responsible” Budget that strengthens the economy and secures future growth.

Given the economic backdrop and the drop in revenue collections, it is little surprise that the Government has refrained from introducing major tax reform initiatives in this year’s Budget.

In fact, the Government has played it safe by giving very little away while at the same time, not looking to claw back too much, apart from some targeted integrity measures.

So while quite a few changes have been proposed, few if any are likely to get many excited. The following is a summary of the major measures proposed.

There was a welcome announcement on excess contributions and confirmation of the increase in Superannuation Guarantee (SG) and additional Government superannuation support for low income earners. Unfortunately predicted changes to the rules on personal deductible superannuation contributions did not take place.

Refund of excess concessional contributions

The Budget announced that individuals will now have the option of a refund up to $10,000 of any excess concessional superannuation contributions, made by them or on their behalf in any particular year. Where this choice is made, the amount refunded will be assessed as income to the individual at their marginal rate of tax, rather than incurring excess contributions tax. However, the choice will only be available for breaches in respect of the 2011/12 year or later years, and only for the first year a breach of the contribution caps occurs.

What does this mean for you?

This measure will provide welcome relief from the imposition of excess contributions tax in many situations where clients have inadvertently breached their contribution caps. However, caution will still need to be exercised, as the buffer of $10,000 is not particularly large. Further, the measure does not appear to provide any targeted relief for those clients who have compulsory SG contributions made on their behalf by two or more employers.

This will solve the large number of cases of small excess contributions but it is still an area where caution is needed. You should continue to check and have your adviser double-check what has already happened during the year and whether the ‘bring forward provision’ has been triggered in a previous year before a large contribution is made.

Federal Budget 2011- 2012

Superannuation

Self Managed Superannuation Funds (SMSFs)

The $150 supervisory levy imposed on SMSFs will increase to $180 from the 2010/11 year. This revenue will be used to fund some minor changes to the regulation of SMSFs that were recommended by the Cooper Review.

The most significant change is the introduction of a penalty regime so that the Australian Taxation Office (ATO) can punish breaches in a measured and appropriate way. At the moment the ATO’s only choice is to make the whole fund non-complying and subject to the top marginal tax rate.


When a mistake is made in running an SMSF there will now be a cost. However, this will be a more sensible regime than having people worry for months waiting to find out whether the ATO is going to impose the ultimate penalty of making the SMSF non-complying.

Super contribution information on payslips

From 1 July 2012 employers will be required to show on payslips the actual amount of superannuation paid into accounts. In addition, superannuation funds must notify employers and employees quarterly if regular payments cease.

Minimum payment amounts for superannuation pensions restored by 2012/13

In recent years, the Federal Government has sought to cushion self-funded retirees who source their income from a superannuation income stream against the effects of financial market instability. This has been achieved by temporarily reducing the minimum payment factors for account-based, allocated and market-linked pensions. The 2011/12 financial year will be the last year these measures will apply, with the ‘regular’ minimum payment factors being restored on 1 July 2012.


This means that the minimum pension factors for superannuation income streams will be as follows until 30 June 2012.

Age Regular percentage factor 2011/2012 year55 - 64 4% 3%65 - 74 5% 3.75%75 - 79 6% 4.5%80 - 84 7% 5.25%85 - 89 9% 6.75%90 - 94 11% 8.25%

95 or older 14% 10.5%

Superannuation co-contribution - pause to the indexation of the income threshold extended to 2012/13

The Government announced in the 2010/11 budget that the income thresholds will remain at $31,920 and $61,920 for the 2010/11 and 2011/12 financial years. This has been extended for a further year to 2012/13.

Previous announcements

The 2011/12 budget re-announced the following measures:

Increasing the Superannuation Guarantee to 12% The Government has confirmed that it will increase the 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.

Government superannuation contribution for low income earnersThe Government has confirmed that from 1 July 2012 individuals on adjusted taxable income of up to $37,000 will have a 15% matching rate applied to concessional contributions made up to a maximum annual amount of $500.


Low-income earning clients derive little benefit from employer or personal deductible superannuation contributions as the tax saving on the contribution is offset by contributions tax. This measure effectively refunds contributions tax on up to $3,333 in concessional contributions made to superannuation each year.

Increase in the concessional contributions cap for those over 50

The Government has confirmed that the transitional measure (that was due to expire on 30 June 2012) afforded to contributors aged 50 years of age and over should remain permanently for those with account balances of less than $500,000.


Finally the Government has acknowledged that quite often it is not until individuals are in their 50’s that 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 for you and your adviser 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.

However, the devil is in the detail. First of all, unlike the standard $25,000 concessional contribution cap, the $50,000 cap will not be indexed nor will the $500,000 threshold for the fund balance. This means that the value of the increased cap will be eroded over time. In addition, the Government has not yet clarified how the $500,000 balance will be determined.

The Government is going ahead with plans to exempt up to $500 of interest income from tax. In a bid to crack down on income splitting, children will no longer receive the low income tax offset for unearned income (subject to some exceptions).

Company tax rate – confirmation of previous announcement

To assist small business companies the Government has announced that they will be eligible for 29 per cent company tax rate from the 2012/13 financial year. The Government has also confirmed that it will cut the company tax rate to 29 per cent for other companies from the 2013/14 financial year.


It is expected that reducing the company tax rate will increase investment and therefore production across all sectors of the economy.

Low income tax offset to be reflected in PAYG withholding

The amount of the low income tax offset (LITO) refunded through reduced PAYG tax withholding is to be increased from 50% to 70%. The remaining 30% of LITO will still be paid as a lump sum on assessment of income tax returns.


Clients eligible for LITO, i.e. those with taxable income less than $67,500 will see an increase in take home pay after 1 July 2011.

Children and low income tax offset

This measure provides for a limitation of the ability of minors to access the low income tax offset (LITO). From 1 July 2011, children under the age of 18 will be unable to reduce the tax they would otherwise be obliged to pay on their ‘unearned’ income (eg. dividends, rent, interest and royalties) by accessing the LITO. Importantly, any income earned by minors from any work they do will not be affected, and similarly for any compensation payments and inheritances they receive.


It was previously possible for minors to receive distributions of unearned income from trusts and not have any tax liability if their annual taxable income didn’t exceed $3,333. However, this strategy was premised on the availability of the LITO. The limitation of access to LITO in these circumstances will mean children under the age of 18 will have a tax-free threshold of just $416 (which hasn’t changed since 1981). If passed in this form, this measure will remove one of the key benefits of acquiring assets in trusts and distributing the income they generate to minor beneficiaries.

Taxation

Phase out of dependent spouse tax offset

The dependent spouse tax offset will be phased out for taxpayers with a dependent spouse born on or after 1 July 1971.

The change will not affect taxpayers with an invalid or permanently disabled spouse, supporting a carer, or people who are eligible for the zone, overseas forces and overseas civilian tax offsets.

Interest bearing accounts/annuities

The Government confirmed that from 1 July 2011 taxpayers will be eligible for a 50 per cent discount on the first $1,000 of interest earned per annum. This will include interest earned on deposits, bonds, debentures and annuity products as well as interest earned indirectly through managed funds. There had been speculation that this measure would be deferred to 1 July 2012.


In short $500 per annum will be exempt from tax. The tax saving afforded to your client will depend on their marginal tax rate as illustrated in the table on the right.

Increase to medical rebate threshold

The Government previously announced that from 1 July 2010 that the medical rebate threshold would increase from $1,500 to $2,000. It is only net medical expenses above this amount that are eligible for the 20% tax offset. In future, this threshold will increase by the CPI, with the first increase to take effect from 1 July 2011.


The increase in the threshold not only makes it harder to qualify for the tax offset but also means that those who do qualify will be $100 worse-off per annum as a result ($500 increase x 20%).

Flood and Cyclone Reconstruction Levy

The Government has left personal income tax rates unchanged from the previously legislated rates. However, in response to the recent natural disasters, a temporary flood and cyclone reconstruction levy will be introduced for one year from 1 July 2011 to help with the recovery.


The levy will apply to individuals, unless certain exemptions apply, earning more than $50,000, in addition to the Medicare levy and Medicare levy surcharge where applicable. For individuals earning more than $50,000 but less than $100,000 a levy of 0.5% will apply, and individuals earning more than $100,000 will be levied an additional 1%.

Marginal tax rate Tax saving per annum*15% $7530% $15037% $18545% $225

Thresholds from 1July 2011 (excludingthe flood levy)

Income range ($) Tax rate %

Thresholds from 1July 2011 (includingthe flood levy)

Income range ($) Tax rate %

0 - 6,000 0 0 - 6,000 0

6,001 - 37,000 15 6,001 - 37,000 15

37,001 - 80,000 30 37,001 - 50,000 30

80,001 - 180,000 37 50,001 - 80,000 30. 5

180,000 + 45 80,001 - 100,000 37. 5

100,001 - 180,000 38

180,000 + 46

*Excluding Medicare Levy

The valuation of car fringe benefits will see the end of a long running practice of going for long drives in March to get the kilometres up to move to a lower FBT valuation factor.

Car Fringe Benefits

Where car fringe benefits are valued using the statutory formula method, the current valuation factors, which reduce as annual distance travelled increases, will be replaced by a single valuation factor of 20%. This will apply to new car arrangements entered into after budget night. In 2011/12, reduced valuations will still apply to cars driven more than 25,000 km and 40,000 km. However, these will be gradually phased out until a single rate applies from 1 April 2014.


The change in valuation method for car fringe benefits will change the value of cars in salary packaging and, where clients plan to enter into new car arrangements, they should carefully assess the value of a car fringe benefit compared with providing their own car. The introduction of a single valuation will eliminate the practice of deliberately driving additional kilometres to reduce the FBT value of a car.

Fringe benefits tax

Family Tax Benefit changes

Several changes were announced to family tax benefit (FTB) including:

• From 1 July 2011 provision to receive an advance payment of FTB Part A of up to 7.5% of the annual payment, subject to a maximum of $1,000. This will be repaid by reduced installments over the following 6 months, subject to the family’s ability to repay the amount without falling into financial hardship.

• From 1 January 2012, children over 21 will no longer be eligible for FTB Part A, however, children aged 22 and over may be eligible to receive Youth Allowance, subject to means testing and academic progress.

• Indexation of FTB Part A and B supplements will be paused for three years.

• Indexation of family payment higher income thresholds and limits will be paused at their current levels until 1 July 2014 instead of being indexed to the CPI. This affects payments such as the baby bonus and paid parental leave.


The ability to receive advance payments of FTB Part A gives additional flexibility to families to meet unexpected expenses. The other measures may see some families’ eligibility to benefits reduced.

No deduction for self education expenses against Youth Allowance

This is a reaction to the 2010 High Court decision of Commissioner of Taxation v Anstis 2010 ATC and will apply from 1 July 2011. Taxpayers who received Youth Allowance between 2006/7 and 2010/11 may still claim a deduction for self-education expenses.

Reduction in HECS discount

From 1 January 2012, the discount for lump sum payments of HECS will be reduced as follows:

• The discount for paying HECS up front will be reduced from 20% to 10%

• The bonus for voluntary repayment of a HECS debt of $500 or more will be reduced from 10% to 5%.


At the outset it should be noted that as HECS debts only increase in line with the CPI, it is a very cheap form of finance. The value of paying HECS up-front or paying lump sums off a HECS debt depends on the rate at which the debt would be repaid through the taxation system. Up-front payment or repayment of lump sums is of greater value to graduates with prospects of high income. The reduction in the discount for up front payment or repayment of lump sums will reduce the incentive to pay HECS up front or repay lump sums.

Social Security

Financial planning is the difference between creating your own financial future and just allowing it to happen - a plan is the best way to make sure your finances meet your immediate and future needs.

By discussing your financial and lifestyle goals, your FFA adviser can build the foundations of a financial plan that, with on-going reviews, ensures you enjoy life and are financially prepared to cope with unforeseen events.

The right plan of action to achieve financial freedom

Financial Foundations Australia believes that every successful plan begins with a strong foundation and follows these steps:

Step 1. Your tax-effective foundationMake the best use of legal tax structures and tax-advantaged products. You save tax, maximise Centrelink entitlements, build wealth faster, protect your wealth from creditors and streamline your estate planning.

Step 2. Protect you and your familyWe analyse both your own and your family’s financial risk and eliminate the financial hardship that could arise from accident, illness or premature death.

Step 3. Building your investment strategyNext we tailor an investment strategy so you reach your goals.

Step 4. Select your investmentsAt this stage it pays to be very choosy. With the aid of our independent research process, we’re able to build your investment portfolio piece by piece, using quality investments selected from leading Australian and international fund managers. Financial Foundations Australia is not tied to one provider.

Step 5. On-going investment reviewsOnce your plan is in place, it pays to regularly review your investments. With regular reviews, your financial plan will always be fine-tuned and relevant to your needs.

FFA advisers own the advice they give - not the products they recommend, so you can always be sure you’re getting high-quality, strategic investment advice tailored to your needs.

More informationFor more information, please contact your adviser at Financial Foundations Australia on (03) 9793 3722.

Why do I need a financial plan?

providing financial advice for over 24 years budget report budget newsletter.pdfin fact, the...

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