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The Budget

The ‘tough’ budget as touted by the government is not so tough. We look at what has changed and what hasn’t and how it affects you.

Disappointingly the budget did not deliver any real savings and cuts (as promised) and is based on revenue forecasts made just six months ago that have proved way too high. The centrepiece of the budget is saving $22b, but after closer inspection and adding the increased spending it is actually only $2.5b. As a consequence, the lack of fiscal policy will leave the Reserve Bank no choice but to control spending and inflation by raising interest rates in the near future.

To get the budget back in surplus, the budget papers now predict an increase in government revenue between now and 2013 of $73b, or 24% in 2 years, including a 36% increase in company tax receipts.

A summary of some of the key points in the budget they may have an effect on your investments and/or personal circumstances are as follows:

SUPERANNUATION

Superannuation was not at the forefront of this year's Federal Budget, with no significant new measures announced, other than those previously foreshadowed.

Contribution caps for over 50's

There will also be a change to the previously announced concessional contribution cap for those over 50 with a superannuation account balance of less than $500,000 (with effect from 1 July 2012, when the current transitional arrangements end). Instead of a cap of $50,000, the cap will be $25,000. 

Account based pension minimum drawdowns

The Government will phase out the pension drawdown relief that has been provided over the last three years. Minimum payment amounts for account-based, allocated and market linked (term allocated) pensions will be reduced by 25% for 2011-12 and will return to normal in 2012-13.

Continuation of the freeze on the Government Co-Contribution thresholds

Under the superannuation co-contribution scheme, the Government provides a matching contribution for contributions made into superannuation out of after-tax income. The matching contribution is up to $1,000 for people with incomes of up to $31,920 in 2010-11 (with the amount available phasing down for incomes up to $61,920). This measure will continue to freeze these thresholds at $31,920 and $61,920 respectively. 

Restatement of previous announcements

There was no further mention of the following changes announced in last year's Budget, that have not yet been introduced, so we assume these will be implemented as planned.

• increase in SG from 9% to 12%, to be phased in over the period from 2013 to 2019
• extend SG to workers aged between 70 and 74, from 1 July 2013
• introduction of an annual Government contribution of $500 for workers   paid up to $37,000 a year, from 1 July 2012

TAXATION 

Fringe Benefits Tax (FBT) 

The fringe benefit treatment of cars will be changed to remove the incentive for people to drive their vehicle further to obtain a larger tax concession. Currently, the sliding scale of rates provides an increased tax concession for salary-sacrificed or employer-provided vehicles that are driven further.

Existing FBT rates will move to the existing 20 per cent rate, which applies to vehicles traveling 15-25,000 km a year. This represents a decrease in the tax rate for vehicles travelling less than 15,000 km a year and an increase in the rate for those travelling more than 25,000 km.

The change will only apply to new vehicle contracts entered into after 7:30pm (AEST) on 10 May 2011. 

Dependent Spouse Tax Offset phase-out

Taxpayers with a dependent spouse aged less than 40 years will no longer be eligible for the dependent spouse tax offset from 1 July 2011.

The change will not affect taxpayers whose dependent spouse is a carer, who is an invalid, or permanently unable to work; and taxpayers with children (eligible for Family Tax Benefit B), or eligible for the zone, overseas forces or overseas civilian tax offsets. Dependent spouses with children will continue to receive Family Tax Benefit B rather than the Dependent Spouse Tax Offset. 

Increase trust taxation

The Government will enable the streaming of capital gains and franked distributions and target the use of low tax entities, especially exempt entities, to reduce the tax payable on the taxable income of a trust. The measure will reduce opportunities for taxpayers to reduce their tax liabilities. 

Increase Medicare Levy threshold

From the 2010/11 financial income year, the Medicare levy low-income threshold will increase to $31,789 (up from $31,196) for couples, and to $18,839 (up from $18,488) for singles.

For families, the additional amount of threshold for each dependent child or student will also be increased to $2,919 (up from $2,865).

The Medicare levy low-income threshold for pensioners below Age Pension age will also be increased. From 1 July 2010, the threshold will rise to $30,439 (up from $27,697). This will ensure that pensioners below Age Pension age do not pay the Medicare levy when they do not have an income tax liability. 

Small business

The budget shows a reduction in company tax rate to 29 per cent for incorporated small businesses. These tax reforms will be available to all small businesses, including sole traders and businesses operating through trusts, partnerships and companies. Further this measure will replace the Entrepreneurs Tax Offset (ETO).

Small business owners will receive a tax write-off of up to $5,000 (up from $1,000 presently) for those wanting to buy a motor vehicle from 2012/13. The write-off will cost the government $350 million and will mean, for example, that a tradesman on a 30 per cent marginal tax rate will receive a tax break of $1275 when buying a new $33,960 ute.

Other changes include:

• an immediate write-off of all assets valued at under $5,000 (up from $1,000 presently)
• a write-off of all other assets (except buildings) in a single depreciation pool at a rate of 30%. Currently, small businesses allocate assets to two different depreciation pools, with two different depreciation rates (30% and 5%); and 

Family Tax Benefit (FTB)

The budget announced an increase in Family Tax Benefit (FTB) Part A for 16-19 year olds with families receiving up to an additional $4,200 a year for each eligible teenager that stays in school (full-time secondary study, or the vocational equivalent).

From 1 January 2012, the new maximum rate of FTB Part A for 16-19 year olds will increase by around $160 per fortnight. This will align with the 13-15 year old rate and ensure assistance for families does not drop when children turn 16.

Low Income Tax Offset

From 1 July 2011, the Government will increase the proportion of the low income tax offset (LITO) that is delivered through workers' week-to-week pay packets from 50 per cent to 70 per cent. This change means instead of being compensated after they put in their tax return at the end of the year, lower income earners are taxed less during the year.

Someone with annual income of $30,000 will get an extra $300 during the year in their regular pay. A person's total LITO entitlement for any one tax year will remain unchanged.

Changes to Low Income Tax Offset for non-working minors

This budget measure is designed to discourage tax avoidance that currently occurs when high-income earners allocate their income to children under 18 years of age.

From 1 July 2011, minors will no longer be able to use the low income tax offset to reduce income tax due on their non-work income, such as that from dividends, interest, rent or royalties. Minors will continue to be able to use the low income tax offset to reduce income tax due on their work income. This means that children under 18 will face the same tax rates on their income from work as those over 18 years.

If you require any further clarification or details on how the budget may affect your personal circumstances, please feel free to contact your Aware Investment Management Group adviser.