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Wednesday, 30 March 2016 22:48

State tax competition - issues for South Australia

Written by

Helen Hodgson, Curtin University

Australia’s federal government initiated two major reform processes after the last election: a tax reform process and reform of the Federation. Prime Minister Malcolm Turnbull’s plan to hand income taxing powers to the states sits at the intersection of the two.

Under the Constitution, the states already have the right to levy income taxes. They effectively conceded this power to the Commonwealth after the Uniform Tax Cases, in wartime 1942 and affirmed in 1957. Both held that the Commonwealth use of the grants power was valid.

The Turnbull proposal is based around the Federal Government cutting income tax rates, then allowing the states to raise income tax directly from residents of that state.

The first challenge is the administration of such a proposal. The Commonwealth took over the collection of state income taxes in 1923 when the states agreed to the national collection of income tax. This led to the introduction of the Income Tax Assessment Act 1936, which ensured income tax laws were applied uniformly across Australia.

Turnbull has said the Commonwealth would continue to collect the tax for the states to avoid compliance costs. The Coalition government has campaigned against red tape, implementing a range of initiatives to reduce overlapping reporting requirements. These include the single touch payroll system that allows employers to report income tax and superannuation obligations in real time. The tax receipts that were issued to accompany tax assessments in the 2015 year would presumably be modified to show the share that was levied by the state.

The biggest challenge that would emerge is if states chose to exercise the right to increase or decrease their income tax rates. Accountability is one of the reasons being put forward for the proposal, on the basis that if the tax is more transparently related to services delivered by the state, the state government will use those taxes more wisely.

However tax competition can also lead to a race to the bottom: if one state lowers its taxes, other states are likely to follow.

Uniformity dominates

If tax competition results in lower income taxes in one state than another, interstate migration could increase, putting more pressure on the states that have not reduced their income tax rates. We have seen the problems that national governments are encountering regarding the appropriate jurisdiction to levy taxes: it can be expected that similar issues would emerge between the states, requiring a range of residency tests to attribute the residency of itinerant or technology-based workers.

Increasing migration between states would put pressure on state governments to reduce their own tax rates. Recent history shows that when the Queensland government reduced state taxes and abolished death duties in the late 1970s all other states and the Federal Government followed. A general lowering of tax rates would defeat the stated intention of allowing states to raise additional funding for health and education.

It would not be surprising to see mobile workers relocating to low tax states, while people more reliant on good health and education services, who may be at a stage in their life when they do not pay tax, would remain in states with better services.

Recent tax policy initiatives in Australia have focused on tax harmonisation as an antidote to tax competition. For example, since 2007 the states have implemented a harmonisation agenda to ensure that the administration of payroll tax is consistent across the country: however it does not extend to rates and thresholds.

There is also a question over what is meant by accountability: is it code for cost shifting? The Prime Minister has already acknowledged that states such as South Australia and Tasmania, which have a weak economic base, would have to be protected. Does this mean that if other states experienced a downturn in economic conditions they could also apply for assistance?

In his announcement the Prime Minister referred to this as the most significant change since World War II. History shows that it has been tried before: in 1978 the Fraser government introduced legislation that allowed the states to levy income tax. It did differ in the detail, but allowed states to impose surcharges or allow rebates. This legislation remained in force for 21 years without being applied by any states, partly due to changes in the political and economic environment.

As it stands the reaction from the premiers on the current proposal has been lukewarm. It would seem that a GST style agreement would be advisable to ensure passage through all relevant parliaments.

While both the formal tax and federation reform processes appeared to have stalled, it seems the government is putting them firmly on the election agenda.

The Conversation

Helen Hodgson, Associate Professor, Curtin Law School. Curtin Business School, Curtin University

This article was originally published on The Conversation. Read the original article.

Thursday, 29 October 2015 05:26

Busting tax myths for better reform

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An extract from Deloittes report on Tax Reform.

 

Australia’s tax reform debate is in desperate need of a circuit breaker, and our report Mythbusting tax reform #2 aims to achieve exactly that. It slices through the myths that clog clear thinking on super, negative gearing and capital gains, and recommends reforms that return simplicity, fairness and sustainability to the way Australia taxes superannuation contributions and capital gains.

This is the second of Deloitte’s mythbusting tax reform reports. The first focussed on issues that are central to Australian prosperity – bracket creep, GST and company tax. This second report covers matters at the heart of Australian fairness – super, negative gearing and capital gains.

Myth 1: Superannuation concessions cost more than the age pension

Super concessions do cost a lot – but nothing like the pension does.

The Treasury estimate of the dollars ‘lost’ to super tax concessions uses a particularly tough benchmark: the biggest possible tax bill that could be levied if super was treated as wage income. It also doesn’t allow for offsetting benefits via future pension savings, or any offsetting behavioural changes. Better measures of super concession costs are still huge, but rather less than the pension.

Myth 2: We can’t change super rules now, because the system needs stability to win back trust

So super concessions don’t cost more than the pension. Yet the costs are still pretty big. And that’s what puts the lie to this second myth. If our super concessions cost lots but achieve relatively little, then Australians are spending a fortune on ‘stability and trust’ in super settings while actually achieving neither. Governments can only truly promise stability if the cost to taxpayers of our superannuation system is sustainable.

Chart: Proposed reform of the tax benefit (loss) of diverting a dollar from wages to super

Deloitte Figure1 301015As the chart above shows, there’s a Heartbreak Hill at the centre of Australia’s taxation system: low income earners actually pay more tax when a dollar of their earnings shows up in superannuation rather than wages, whereas middle and high income earners get big marginal benefits. So one example of a better super tax system would be an updated and simplified version of the contributions tax changes proposed in the Henry Review – where everyone gets the same tax advantage out of a dollar going into super, with a concession of 15 cents in the dollar for both princes and paupers.

Making the tax incentives for contributing into super the same for everyone also comes with a pretty big silver lining. As current incentives are weighted towards the better off, there is a tax saving from making super better – a reform dividend of around $6 billion in 2016-17 alone.

Even better, because this is a change to the taxation of contributions – when the money goes in – it avoids the need for any additional grandfathering. Nor does it add extra taxes to either earnings or benefits.

And because the incentives are simpler and fairer, the current caps on concessional (pre-tax) contributions can also be simpler and fairer. They could be abolished completely for everyone under 50, and the cap could be raised for everyone else (subject only to a safety net of a lifetime cap). That would put super on a simpler, fairer and more sustainable basis.

And, depending on how the super savings are used (to cut taxes that really hurt our economy, or to fund social spending, or to help close the Budget deficit), the resultant package could appropriately help Australians to work, invest and save. For example, this reform alone would pay for shifting the company tax rate down to 26% from the current 30%.

Myth 3: Negative gearing is an evil tax loophole that should be closed

The blackest hat in Australia’s tax reform debate is worn by negative gearing. Yet negative gearing isn’t evil, and it isn’t a loophole in the tax system. It simply allows taxpayers to claim a cost of earning their income. That’s a feature of most tax systems around the world, and a longstanding element of ours too.

Yes, negative gearing is over-used, but that’s due to (1) record low interest rates and easy access to credit, (2) heated property markets and (3) problems in taxing Australia’s capital gains. Sure, the rich use negative gearing a lot, but that’s because they own lots of assets, and gearing is a cost related to owning assets: no smoking gun there.

Myth 4: Negative gearing drives property prices up, but ditching it would send rents soaring

And those who argue the toss on negative gearing raise conflicting arguments on its impact on housing.

Let’s start with a key perspective: interest rates have a far larger impact on house prices than taxes. The main reason why housing prices are through the roof is because mortgage rates have never been lower. And, among tax factors, it is the favourable treatment of capital gains that is the key culprit – not negative gearing.

Equally, while negative gearing isn’t evil, nor would ditching it have a big impact on rents. By lowering the effective cost of buying, negative gearing long since raised the demand for buying homes that are then rented out. Yet the impact on housing prices of negative gearing isn’t large, meaning that the impact of it (or its removal) on rents similarly wouldn’t be large.

Myth 5: The discount on capital gains is an appropriate reward to savers

The basic idea of a discount on the taxation of capital gains is very much right. There should be more generous treatment of capital gains than of ordinary income, because that helps to encourage savings (and hence the prosperity of Australia and Australians), and because the greater time elapsed between earning income and earning a capital gain means it is important to allow for inflation in the meantime.

But we overdid it. We gave really big incentives for some taxpayers (such as high income earners) to earn capital gains, versus little incentive for others (such as companies). And the discounts adopted back in 1999 assumed that inflation would be higher than it has been – meaning they’ve been too generous.

So the capital gains discount is no longer meeting its policy objectives. That not only comes at a cost to taxpayers, but to the economy as well. One possible option would be to reduce the current 50% discount for individuals to 33.33%.

Deloitte’s report ‘Mythbusting tax reform #2’ was prepared by tax and superannuation specialists from Deloitte in conjunction with economists from Deloitte Access Economics. See full report for disclaimers.

Wednesday, 08 July 2015 05:24

Do Franking Credits Matter?

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Dividend imputation has been under scrutiny. The Tax Discussion Paper raises the notion that imputation does little to encourage investment in a small, open economy like Australia, where share prices and hence the cost of capital are set in international capital markets. Imputation is thus seen as a costly tax break for domestic shareholders with minimal associated benefits for the overall economy. The idea is that the removal of imputation could fund a reduction in the corporate tax rate, perhaps to as low as 20%, leading to a surge in foreign investment.

This line of argument has some merit: lowering the corporate tax rate should indeed attract additional foreign investment at the margin. However, this stance is somewhat narrow. To be fair, the Tax Discussion Paper is only airing a view for discussion, not making a policy recommendation. Nevertheless, it is worth asking what may be overlooked in adopting this line.

Mixed evidence on whether imputation is priced

The relationship between imputation and the return on investment required to satisfy the market (which might be called ‘cost of capital’) has been extensively examined in the finance literature. Unfortunately, there is no agreement.

One problem is that investors benefit from imputation to varying degrees. There are two theoretical approaches to solving this. The first involves identifying the ‘marginal investor’ – the last investor enticed to hold a stock, so that demand equals supply. The idea that share prices are determined in international capital markets implicitly assumes a marginal overseas investor who places no value on imputation credits. The second approach views share prices as reflecting some weighted average of investor demands. Here imputation credits would be partially priced, perhaps in accord with the 60-80% held by domestic investors.

Empirical analysis is no more enlightening. Four methods have been used to estimate the market value of imputation credits: analysing ex-dividend price drop-offs; comparing securities that differ in their dividend/imputation entitlements; examining if imputation credits are associated with lower market returns; and establishing whether stocks offering imputation credits trade on higher prices relative to fundamentals like earnings. Results are mixed. The majority of drop-off and comparative pricing studies find imputation to be partially priced, with a wide range of estimates. Meanwhile, footprints from imputation are hard to detect in returns and price levels. In any event, all empirical studies suffer from significant methodological issues.

Another issue is that the pricing of imputation might vary across stocks or time, perhaps due to differing marginal investors. Of particular relevance is the smaller, domestic company segment where investors are substantially local. In this case, it is reasonable to expect that imputation might be priced.

With the finance literature failing to arrive at a consensus, the assumption that imputation does not lower the cost of capital amounts to an extreme position along the spectrum. The possibility remains that imputation credits might be priced either partially, or in certain situations.

Imputation and behaviour

Of prime importance is how imputation influences behaviour, and whether these behaviours are beneficial or otherwise. This matters more than how imputation impacts ‘numbers’ like cost of capital estimates. Many decisions are not based on formal quantitative analysis; and imputation tends to be a second-order influence in any event. Analysis may be used to support decisions, but rarely drives them.

Recognition of the value of imputation credits has influence over behaviour in three notable areas, the first being the clearest and most important:

  • Payout policy – Imputation has encouraged higher company payouts: the divergence in the payout ratio for Australia versus the world post imputation is stark (see chart). Actions taken by companies to distribute imputation credits clearly indicate they recognise their value to certain shareholders, e.g. off-market buy-backs.
    .
  • Where taxes are paid – Imputation encourages paying Australian company tax at the margin (referred to as ‘integrity benefits’ in the Tax Discussion Paper). If the tax rate is roughly the same in Australia and overseas, why not pay locally and generate imputation credits?
    .
  • Portfolios – Australian investors may prefer domestic companies paying high, fully-franked yields, all other things being equal. This preference is more likely to manifest as a ‘tilt’, rather than a dominating factor. There are multiple reasons for home bias, or the historical favour for bank stocks, for instance.

GW Figure1 030715

Would removing imputation matter?

Whether and how removing imputation would make a difference depends on what else happens, especially any concurrent corporate tax rate reduction. For instance, this could dictate the tenor of share price reactions, as effects from loss of imputation are pitted against higher earnings. Rather than delve into a multitude of possibilities, I offer two substantial comments.

First, removing imputation would do away with a major driving force for higher payouts. Higher payouts have contributed to more disciplined use of capital, through reducing the ‘cash burning a hole in company’s pockets’, and creating more situations where justification is required to secure funding. This is a MAJOR benefit of the imputation system: a view also expressed by many fund managers. Hence dismantling imputation could be detrimental to both shareholders and the Australian economy through less efficient deployment of capital.

Second, imputation probably matters most for small, domestic companies, many of which are unlisted. In this sector, it is more likely that local investors who value imputation credits are the ones setting prices and providing the funding. Any adverse impacts from removing imputation may be concentrated in this (economically important) segment.

Imputation removes the double-taxation of corporate earnings, but only for resident shareholders. The concept of reintroducing double-taxation for domestic investors in order to fund a revenue-neutral switch that provides a net benefit to overseas investors doesn’t seem quite right. The notion that the outcome will be substantially greater foreign investment with limited losses elsewhere appears questionable, especially once the implications for domestically-focused companies and potential behavioural responses are taken into account.

 

 

Geoff Warren is Research Director at the Centre for International Finance and Regulation (CIFR). This article draws on a paper titled “Do Franking Credits Matter? Exploring the Financial Implications of Dividend Imputation”, written with Andrew Ainsworth and Graham Partington from the University of Sydney. The paper can be found at: http://www.cifr.edu.au/project/F004.aspx

Pausing indexation of the Medicare Levy Surcharge and Private Health Insurance Rebate thresholds

1 July 2015

 

 

The Government will pause indexation of the Medicare Levy Surcharge and Private Health Insurance Rebate income thresholds for three years from 1 July 2015.

The threshold and rebate levels applicable from 1 April 2014 are:

Singles Families

≤$88,000 ≤$176,000

$88,001-102,000 $176,001-204,000

$102,001-136,000 $204,001-272,000

≥$136,001 ≥$272,001

Rebate

 

Standard

Tier 1

Tier 2

Tier 3

< Age 65

29.04%

19.36%

9.68%

0%

Age 65-69

33.88%

24.20%

14.52%

0%

Age 70+

38.72%

29.04%

19.36%

0%

Medicare Levy Surcharge

All ages

0.0%

1.0%

1.25%

1.5%

Single parents and couples (including de facto couples) are subject to family tiers. For families with children, the thresholds are increased by $1,500 for each child after the first.

 

Increase the Medicare levy low-income thresholds for families

1 July 2013

 

 

The Government will increase the Medicare levy low-income phase-in threshold for families. The threshold for couples with no children will be increased to $34,367 (from $33,693 in 2012-13), the additional amount of threshold for each dependent child or student will also be increased to $3,156 (from $3,094 in 2012-13).

There will be no increase in the Medicare levy low-income thresholds for individuals ($20,542) and pensioners ($32,279 individual / $46,000 married or sole parent) which will remain at 2012-13 levels.

 

Dependent Spouse Tax Offset (DSTO) to be abolished

1 July 2014

 

 

The Government will abolish the dependent spouse tax offset for all taxpayers from 1 July 2014. Therefore, the limited access to the DSTO to those whose dependent spouse was born before 1 July 1952 will no longer be available.

Taxpayers that qualified for the Zone Tax Offset, the Overseas Civilians Tax Offset or Overseas Forces Tax Offset and that qualified for the DSTO may instead now qualify for the Dependent (Invalid and Carer) Tax Offset (DICTO) where eligible.

Taxpayers with a dependant who is genuinely unable to work due to a care obligation or a disability may be eligible for the DICTO.

 

Mature Age Worker Tax Offset (MAWTO) to be abolished

1 July 2014

 

 

From 1 July 2014, the Government will abolish the MAWTO. The phase out that was introduced from 1 July 2012, limiting it to taxpayers born before 1 July 1957, will no longer apply.

The Government believes that encouraging mature age workers to participate in the workforce can be done more effectively through incentive payments such as Restart.

 

Reminder: Increase in the Medicare Levy from 1 July 2014

 

As per the 2013 Budget, the Medicare Levy will increase from 1.5% to 2.0% from 1 July 2014 to provide funding for DisabilityCare Australia. This measure has already been legislated.

Low income earners will continue to receive relief from the Medicare Levy through the low income thresholds for singles, families, seniors and pensioners.

The current exemptions from the Medicare Levy will also remain in place, including for blind pensioners and sickness allowance recipients.

GEM Capital Comment

Taking into account the new Temporary Budget Repair Levy, the increase in the Medicare Levy will result in an effective tax rate for taxable income over $180,000 of 49% for the period between 1 July 2014 and 30 June 2017. 

Tuesday, 13 May 2014 22:43

Budget 2014 - Reduction in Company Tax rate

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Reduction in company tax rate

1 July 2015

 

 

The company tax rate will be reduced by 1.5% to 28.5% from 1 July 2015. For companies earning more than $5,000,000 in taxable income, this reduction will be offset by the 1.5% levy to fund the paid parental leave scheme which also commences from 1 July 2015.

GEM Capital Comment

With the reduction in the company tax rate, investors in companies earning less than $5 million may receive greater dividends but less franking credits, leaving them in the same net after tax position. However, for shareholders of companies with income of more than $5 million, the 1.5% reduction in tax will be offset by the 1.5% levy for the paid parental leave scheme. As a result, shareholders may receive the same level of dividends but less franking credits (assuming the levy is not franked), leaving them worse off. 

Friday, 02 May 2014 04:04

Increasing attraction of Salary Sacrifice

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The imminent increase to the Medicare Levy and the planned Deficit Tax will soon make salary sacrifice even more attractive.

 

By way of background, from 1 July 2014, the Medicare Levy will increase from 1.5% to 2%.  For those who are employees and there are therefore in a position to salary sacrifice, the increase in the Medicare Levy actually increases the tax effectiveness of salary sacrificing.  This is because the Medicare Levy does not apply sacrificed amounts whereas it does apply to your taxable income.  However to emjoy this tax saving, you will need to sacrifice benefits that are exempt from fringe benefits tax such as superannuation, tools of trade, work related laptops, briefcases etc.  Where you sacrifice benefits that attract FBT (such as home loan repayments, cars used privately, school fees etc) the higher FBT rate of 47% will apply and thuse negate the benefit of this strategy.

 

The tax effectiveness of salary sacrifice will be enhanced even further if the Government goes ahead with its planned Deficit Tax which has been foreshadowed in recent times.  If implemented as reported, from 1 July 2014 the Deficit Tax would add 1% to the current 37% personal income tax rate, and 2% to the top marginal rate of 45%.  By salary sacrificing FBT exempt benefits however (such as superannuation) you can avoid these tax increases, and of course enjoy the benefit for which you have sacrificed salary (eg superannuation, laptops etc)

 

Those wanting to enter into a salary sacrifice arrangement, should discuss it with their employer.

Monday, 27 August 2012 07:02

Reversionary Beneficiary

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Allocated Pensions - Reversionary Pension could save Tax for surviving spouse

retirement-planning

Many people are under the impression that their will deals with all of their assets after death.  Not so generally with respect to people’s superannuation.

The payment of the balance of your superannuation fund, after your death, will generally be to a dependant beneficiary, such as your spouse or a dependant child.  However if no nomination has been made, the decision about where to pay benefits could rest with the trustee of the super fund.  It may be beneficial to pay your superannuation benefit as a pension rather than a lump sum.  To facilitate this your fund may allow you to nominate what is known as a “reversionary beneficiary”. The nomination of a reversionary beneficiary allows for the continuation of your pension upon your death, locking in some important potential benefits.

The rules of the fund (trust deed for Self Managed Super Funds must allow you to nominate a reversionary at the time you begin the original allocated pension, this is an important aspect for trustees of Self Managed Super Funds to check.

Some advantages of nominating a reversionary beneficiary.

Continuity of Tax Treatment - If the primary beneficiary was 60 or older at the time of death, then payments to the reversionary beneficiary will be tax exempt regardless of the age of the beneficiary. This is also the case if the reversionary beneficiary is also 60 or older but the member died before reaching 60.

John is 62 years old and has commenced an allocated pension with his wife Mary aged 57 as his reversionary beneficiary. If John dies Mary would continue to receive his pension payment of $30,000 per year tax free even though she is only 57 years old.

This benefit can be particularly important if Mary has another source of taxable income in her own right where she has already used up her tax free and low tax threshold.

Your benefit is paid according to your wishes. Where a valid reversionary nomination is made, the trustee of the superannuation fund is bound to continue paying the pension to your nominated reversionary upon your death. This takes away the risk that the superannuation fund trustee may pay part or all of your benefit to someone other than whom you desired.

This risk can arise when people have multiple spouses (although not at the same time) and children from different relationships.  Sometimes in these situations having assets bypass the estate can reduce the risk of an estate being contested resulting in hefty legal bills.

There can clearly be benefits in establishing a “Reversionary Beneficiary” for investors with allocated pensions, however these nominations can only be made at the time of establishment. For those with pre-existing allocated pensions, they could simply rollover their fund to a new fund provider and nominate a reversionary beneficiary at that time, but this needs to be considered against any adverse effects on Centrelink entitlements.

 

Thursday, 19 July 2012 22:32

Government Ad on Tax Cuts - Deceptive Conduct

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This is the advertisement that is being prominently displayed around the country (at great expense to the taxpayer) relating to the tax cuts that become effective from 1st July 2012 to offset the impact of the carbon tax.

This ad should be accompanied by the sort of warning you would expect to find on your car side mirrors "Tax Cuts are smaller than they appear".

Our issue lies with the assertion in the ad that the tax free threshold is tripling to $18,200.  This leaves the reader with the feeling that they are about to receive a  very generous tax cut and fails to state that the current effective tax free threshold is currently $16,000 when the low income rebate is considered.

The Government goes to great lengths with retailers to ensure that prices must be expressed as a dollar figure per litre of drink, or per tissue etc.  Financial services providers must disclose in dollar terms as well, rather than using percentages as apparently studies suggest that more than half of Australians do not understand how to calculate them (note I did not use the term 50%).

Despite the Government insisting that business openly disclose facts in a manner that the average member of the public can understand, there appears to be a double standard when it comes to Government advertising.

The reality of the July 2012 tax cuts is that an average Australian taxpayer earning less than $80,000pa receives a tax cut of around $300 when all of the various changes to the tax free threshold, marginal rates and rebates are considered.  Refer our previous blog article on what the tax cuts mean for you at http://www.gemcapital.com.au/blog/carbon-tax-tax-changes-and-what-it-means-to-you-from-1st-july-2012

But then I don't suppose that a $300 tax cut sounds anywhere near as good as tripling the tax free threshold.

There shouldn't be a rule for us and a separate rule for the Government and the Unions when it comes to advertising

 

 

 

23 May 2012 – The private health insurance rebate is to be means tested from July 1, 2012 but a method of maintaining the full 30% rebate has emerged.

Some private health insurance companies are accepting pre-payment of premiums before June 30, 2012, which will allow health fund members to lock in the current rebate before the new income-tested scaled reductions to the rebate comes into effect.

The office of the Minister for Health, Tanya Plibersek, has confirmed that private health insurance premiums that are paid before June 30, 2012 will qualify the payer for the level of rebate under existing rules, but that payments made after July 1, 2012 will be
subject to the new health insurance rebate rules.

The legislation allows for health insurance providers to determine themselves if they will allow for pre-payment of premiums. Many health insurers have done just that, and allow for pre-payment of up to 12 months, some allowing 18 months and one company
even providing for up to 30 months' pre-payment.

The Private Health Insurance Ombudsman's office (PHIO) confirms that the relevant legislation (the Fairer Private Health Insurance Incentives Act 2012) is worded in such a way to allow for the date when actual payments are made for health cover premiums to
determine under which financial year eligibility for relevant government rebates or offsets is set.

The new means testing will mean that singles earning more than $130,000 and households on more than $260,000 will miss out entirely on the rebate from July 1, 2012. The reduction in rebate levels starts after individual incomes reach $84,000 and family
income passes $168,000 (see table below).

REBATE
Unchanged               Tier 1                          Tier 2                           Tier 3

Singles            <$84,000              $84,001-97,000            $97,001-130,000          >$130,001
Families          <$168,000            $168,001-194,000        $194,001-260,000         >$260,001

< Age 85            30%                       20%                              10%                              0%

< Age 65-69       35%                       25%                              15%                              0%

< Age 70+          40%                      30%                               20%                              0%

There are three ways to claim the rebate. Either by asking your fund to give you the rebate in the form of a reduced premium, through a Department of Human Services service centre as a cash payment or cheque (and there's another form for that), or claim it back through your annual income tax return

The carbon tax has now become law with effect from 1st July 2012.  Here we take a look at the changes to the personal tax system that will be made and how that will impact you.

Executive Summary

1. According to Government estimates, households will see cost increases of $9-90 per week which includes increasing electricity and gas charges.

2. There are two ways that households will receive compensation for the additional costs which include increases in pensions, allowances and family payments in addition to tax cuts.

Specifically these measures are:

- Pensioners and self funded retirees will get up to $338 extra per year if they are single and up to $510 per yer for couples combined.  There will be a cash payment made to these people automatically in May/June 2012 which represents a "bring forward" payment.

- Families receiving Family Tax Benefit Part A will get up to an extra $110 per child.

- Eligible Families will get up to extra $69 in Family Tax Benefit B.

- Allowance recipients (eg New Start Allowance) will get up to $218 extra per year for singles, $234 per year for single parents and $390 per year for couples combined.

- On top of this, taxpayers with annual income of under $80,000 will all get a tax cut, with most receving at least $300 per year.

Tax Rate Changes In Detail

The new tax thresholds from 1st July 2012 will be as follows:

Taxable income Tax on this income
0 - $18,200 Nil
$18,201 - $37,000 19c for each $1 over $18,200
$37,001 - $80,000 $3,572 plus 32.5c for each $1 over $37,000
$80,001 - $180,000 $17,547 plus 37c for each $1 over $80,000
$180,001 and over $54,547 plus 45c for each $1 over $180,000

 

The tax free threshold will rise from $6,000 to $18,200, and the maximum value of the Low-income tax offset (LITO) will be reduced from $1,500 to $445.  This means that the effective tax free threshold for ordinary Australians considering the LITO is now $20,542.

The first marginal tax rate will be increased from 15 per cent to 19 per cent, and will apply to that part of taxable income that exceeds $18,200 but does not exceed $37,000.

The second marginal tax rate will be increased from 30 per cent to 32.5 per cent, and will apply to that part of taxable income that exceeds $37,000 but does not exceed $80,000.

All of this results in tax cuts for working Australians earning up to $80,000 per year of around $300.

For retirees over the age of 65, who are entitled to the Seniors or Pensioner Tax Offset, the effective tax free threshold now rises to approx $32,200pa for singles and approx$29,000pa for each member of a couple living together ($58,000pa combined)

Food for thought:  Australia's initial carbon tax is set at $23 per tonne.  China is considering a carbon tax of $1-50 per tonne and according to a recent Financial Review article European businesses currently pay between $8-70 - $12-60 per tonne.

Note: Advice contained in this articler is general in nature and does not consider your personal situation or needs. Please do not act on this advice until its appropriateness has been determined by a qualified adviser.  While the taxation implications of this strategy have been considered, we are not, nor do we purport to be registered tax agents. We strongly recommend you seek detailed tax advice from an appropriately qualified tax agent before proceeding.  The information provided is current as at March 2012.

 

 

 

 

 

 

 

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