Wednesday, 15 January 2014 00:57

Govt's Super and Tax Plans confirmed

Draper_05The Coalition Government has reiterated its position on a range of previously announced superannuation and tax issues, as part of the Mid-Year Economic and Fiscal Outlook.

The key take-outs of interest include:

  • The next increase in the superannuation guarantee rate to 9.5% will be deferred for two years.
  • A range of measures relating to the Mineral Resource Rent Tax that were legislated during the previous Government's tenure will be repealed.  This includes the low income super contribution, income support bonus and school kids bonus.
  • The 2015 personal tax cuts will not proceed.
  • Benefits from the Government's Paid Parental Leave scheme will generally be paid by the Department of Human Services, not the person's employer.  Efective 1 March 2014.
  • Deeming will be extended to include allocated pensions from 1st January 2015 (for new pensions only)
  • The tax of 15% on earnings exceeding $100,000pa from assets held by a member in a superannuation pension will not proceed.

 

DISCLAIMER: The above information is commentary only (i.e. our general thoughts).  It is not intended to be, nor should it be construed as, investment advice.  To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information.  Before making any investment decision you need to consider (with your financial adviser) your particular investment needs, objectives and circumstances.

Published in Investment Advice
Friday, 02 August 2013 13:29

New levy on bank deposits - not on banks

413401-130803-bill-leak-galleryExpect depositors to take the hit!

Media outlets reported on Thursday that the Federal Government was planning to introduce a deposit insurance levy on Australian Banks.  Details of the proposed change have just been released.

The levy is to be implemented by the way of fixed fee of 0.05% on deposits up to $250,000.  There are a number of possible reactions by the banks to such a levy. Banks will either (i) absorb the fee and deliver a lower profit to shareholders, (ii) source additional revenue through fees and higher mortgage rates, or (iii) reduce the deposit rates paid to investors.

Given the oligopolistic nature of the Australian banking industry, we think outcome (iii) is most likely.  Indeed, Australian Bankers Association head Steven Munchenberg said that he expects that the banks will pass the levy on to customers in terms of lower interest rates on their deposits.  Combined with an anticipated cut in official interest rates from 2.75% to 2.50% at the RBA’s meeting next Tuesday, Australian savers face the prospect of a one-two hit to their income stream in quick succession, after already suffering significant reductions in income streams following a series of successive interest rates cuts since October 2011.  The question investors need to answer becomes what should they do in the face of these changes.

Sacrifices in income levels and lifestyle are embedded in the lower returns from bank deposits, making alternative sources for yield more compelling. Take for example, the current Australian equity market yield of around 4.3% net. After including the full benefit of franking credits, the gross yield of the Australian share market becomes 5.7% which is more than double the RBA cash rate.

Finally - it must be remembered that this is not yet law, and it's outcome depends on the timing of the election, and who wins.

This material has been provided for general information purposes and must not be construed as investment advice. This material has been prepared without taking into account the investment objectives, financial situation or particular needs of any particular person. Investors should consider obtaining professional investment advice tailored to their specific circumstances prior to making any investment decisions and should read the relevant Product Disclosure Statement.

Published in Fixed Interest

Draper_05This is the first year that the tax free threshold has risen to $18,200, and therefore many more Australians now no longer need to complete a full tax return.

Those with investments in Australian shares (owned either directly or through managed funds) should ensure that they claim their entitlement to imputation credits.  But you may not have to complete a full tax return to do that.

We have sourced this article from the ATO to assist you in determining whether you need to complete a full tax return or whether you can simply use the "Application for Refund of Franking Credits" form.

Important Point - Retirees should pay particular attention to "Reason 2"

 

If any of the following applies to you then you must lodge a tax return.

Reason 1

During 2012-13, you were an Australian resident and you:

  • paid tax under the pay as you go (PAYG) withholding or instalment system, or
  • had tax withheld from payments made to you.

Reason 2

You were eligible for the seniors and pensioners tax offset, and your rebate income (not including your spouse's) was more than:

  • $32,279 if you were single, widowed or separated at any time during the year
  • $31,279 if you had a spouse but one of you lived in a nursing home or you had to live apart due to illness (see the definition of Had to live apart due to illness in T2 Seniors and pensioners (includes self-funded retirees)), or
  • $28,974 if you lived with your spouse for the full year.

To work out your rebate income, see Rebate income or use the Rebate income calculator for seniors and pensioners tax offset.

Reason 3

You were not eligible for the seniors and pensioners tax offset but you received a payment listed at question 5 and other taxable payments which when added together made your taxable income more than $20,542.

Reason 4

You were not eligible for the seniors and pensioners tax offset and you did not receive a payment listed at question 5 or question 6, but your taxable income was more than:

  • $18,200 if you were an Australian resident for tax purposes for the full year
  • $416, if you were under 18 years old at 30 June 2013 and your income was not salary or wages
  • $1 if you were a foreign resident and you had income taxable in Australia which did not have non-resident withholding tax withheld from it, or
  • your part-year tax-free threshold amount if you became or stopped being an Australian resident for tax purposes; read question A2 or phone 13 28 61.

Other reasons

You must lodge a tax return if any of the following applied to you:

    • You had a reportable fringe benefits amount on your:
      • PAYG payment summary - individual non-business, or
      • PAYG payment summary - foreign employment.
    • You had reportable employer superannuation contributions on your:
      • PAYG payment summary - individual non-business
      • PAYG payment summary - foreign employment, or
      • PAYG payment summary - business and personal services income.
    • You did not claim your full private health insurance rebate entitlement as a premium reduction, or a direct payment from Medicare, and your income for surcharge purposes is below $84,000 for singles and $168,000 for families*

* The family income threshold is increased by $1,500 for each Medicare levy surcharge dependent child after the first child.

  • You carried on a business.
  • You made a loss or you can claim a loss you made in a previous year.
  • You were 60 years old or older and you received an Australian superannuation lump sum that included an untaxed element.
  • You were under 60 years old and you received an Australian superannuation lump sum that included a taxed element or an untaxed element.
  • You were entitled to a distribution from a trust or you had an interest in a partnership and the trust or partnership carried on a business of primary production.
  • You were an Australian resident for tax purposes and you had exempt foreign employment income and $1 or more of other income. (Read question 20 Foreign source income and foreign assets or property for more information about exempt foreign employment income. For the 2009-10 income year and subsequent years, there are changes limiting the exemption for foreign employment income.)
  • You are a special professional covered by the income averaging provisions. These provisions apply to authors of literary, dramatic, musical or artistic works, inventors, performing artists, production associates and active sportspeople.
  • You received income from dividends or distributions exceeding $18,200 (or $416 if you were under 18 years old on 30 June 2013) and you had:
    • franking credits attached, or
    • amounts withheld because you did not quote your tax file number or Australian business number to the investment body.
  • You made personal contributions to a complying superannuation fund or retirement savings account and will be eligible to receive a super co-contribution for these contributions.
  • You have exceeded your concessional contributions cap and may be eligible for the Refund of excess concessional contributions offer: see Super contributions - too much super can mean extra tax.
  • Concessional contributions were made to a complying superannuation fund or retirement savings account and will be eligible to receive a low income superannuation contribution, providing you have met the other eligibility criteria.
  • You were a liable parent or a recipient parent under a child support assessment unless you received Australian Government allowances, pensions or payments (whether taxable or exempt) for the whole of the period 1 July 2012 to 30 June 2013, and the total of all the following payments was less than $22,379:
  • You were either a liable parent or a recipient parent under a child support assessment. If this applies to you, you cannot use the short tax return.

Deceased estate

If you are looking after the estate of someone who died during 2012-13, consider all the above reasons on their behalf. If a tax return is not required, complete the and send it to us. If a tax return is required, see Completing individual information on your tax return for more information.

Franking credits

If you don't need to lodge a tax return for 2012-13, you can claim a refund of franking credits by using the publication Refund of franking credit instructions and application for individuals 2013 (NAT 4105) and lodging your claim by mail, or phone 13 28 65.

Published in Investment Advice

The Government has announced a range of superannuation reforms, including:

  • taxing earnings in pension phase that exceeds $100,000pa
  • recognising deferred annuities for earnings tax concession purposes
  • increasing the concessional contributions cap for those aged 50 and over
  • increasing the ability to refund excess contributions
  • commence deeming account based pensions under the social security income test
  • increasing the balance threshold below which lost super must be transferred to the ATO

The majority of these proposed reforms will commence on 1st July 2014.  It is important to note that the changes announced are not yet legislated and may change prior to becoming law.

1. Tax treatment of earnings on superannuation assets supporting income streams – from 1 July 2014

From 1 July 2014 the Government proposes that future earnings, including interest and dividends, on assets supporting an income stream liability will be tax free up to $100,000 a year for each individual. Earnings above the $100,000 threshold are proposed to be taxed at the 15% tax rate that applies to earnings in the accumulation phase of super.

Under current tax rules, all income received by a superannuation fund from assets supporting an income stream such as an account based pension, is completely tax free.

The Government has also announced that the proposed $100,000 threshold will be indexed to the Consumer Price Index (CPI), and will be increased in increments of $10,000.

Special arrangements for capital gains on assets purchased before 1 July 2014

The Government has also announced that special rules will apply to the taxation of capital gains on assets purchased before 1 July 2014 to allow people time to restructure their superannuation arrangements where desired. These are:
  • For assets purchased before 5 April 2013, the proposed changes will only apply to capital gains that accrue after 1 July 2024
  • For assets purchased from 5 April 2013 to 30 June 2014, individuals will have the choice of applying the proposed changes to the entire capital gain, or only that part that accrues after 1 July 2014
  • For assets that are purchased from 1 July 2014, the reform will apply to the entire capital gain.

Changes to apply to defined benefit funds

The Government has also announced the proposed changes will also apply to members of defined benefit funds in the same way that they apply to members of accumulation funds.

This is proposed to be achieved by calculating the notional earnings each year for defined benefit members in receipt of a concessionally-taxed superannuation pension. These calculations will be based on actuarial calculations, and will depend both on the size of the person's superannuation pension and their age. The amount of notional earnings each year will fall as a person grows older, in the same way that yearly earnings for people in defined contribution schemes fall over time as they draw down their capital.

GEM Comment

At this stage it is unclear how these proposals would practically work. However, to cater for individuals who have two or more pension funds it seems likely that trustees will be required to report income amounts received by the fund in respect of each member.

The proposed special arrangements for capital gains may also require trustees, including self- managed super fund (SMSF) trustees, and their advisers to take into account the potential future tax treatment of a fund’s CGT assets when reviewing the fund’s investment strategy and portfolio.

Other unresolved questions in relation to these reform proposals include:

  • whether capital gains will still attract the capital gains tax discount for the purposes of the $100,000 threshold
  • if capital losses in one fund or investment option will be able to be offset against capital gains in another fund or investment option
  • whether any tax liability on income over the $100,000 threshold will be levied on the member or the fund.

2. Concessional taxation for deferred annuities – from 1 July 2014

The Government will encourage the take-up of deferred lifetime annuities, by providing these products with the same concessional tax treatment that superannuation assets supporting income streams receive.

 

3. Concessional contributions cap – from 1 July 2013

The Government proposes to introduce a higher concessional contributions cap, initially for those aged 60 or more, and then for those aged 50 or more. This higher cap will be $35,000 per year, unindexed. Table 1 illustrates the concessional caps that will apply for the 2012-13 to 2014-15 financial years.

Table 1

Importantly, the Government has confirmed that it will not proceed with earlier proposals to limit the new higher cap to those aged 50 or more with superannuation balances below $500,000.

GEM comment

The Government has recognised that this measure will “...allow people who have not had the benefit of the Superannuation Guarantee for their entire working lives to have the ability to contribute more to their superannuation as their retirement age approaches...”. However, indexation of the standard concessional cap means that by 1 July 2018, it is expected to reach the higher $35,000 cap for those under 50.

The effectiveness of transition to retirement (TTR) strategies has been limited in recent years by a number of concessional cap reductions. With eligible clients aged over 60 (from 1 July 2013) and aged 55 to 59 (from 1 July 2014) able to make greater concessional contributions, TTR strategies will in many cases be more tax effective and lead to a higher end retirement balance.

4. Excess concessional contributions – from 1 July 2013

The Government proposes allowing all individuals to withdraw any excess concessional contributions made from 1 July 2013 from their superannuation fund. Additionally, the Government will tax excess concessional contributions at the individual’s marginal tax rate, plus an interest charge (recognising that excess contributions tax is collected later than personal income tax).

The Government has also confirmed that individuals with income greater than $300,000 will be subject to a 30% rate of tax on certain non-excessive concessional contributions rather than the 15% rate.

GEM comment

Currently, an individual may request a refund of excess concessional contributions of up to $10,000 made since 1 July 2011 on a once-only basis. It would appear that the important change announced in the current reforms is to extend that relief to all concessional contributions, regardless of amount and when made.

The imposition of an additional interest charge on excess concessional contributions appears likely to curtail strategies for those on the highest marginal tax rate to deliberately make excess concessional contributions. Currently, an individual on the 46.5% marginal tax rate is subject to the same rate of tax on personal income as excess contributions, but benefits by a timing arbitrage on the latter, due to the collection of PAYG income tax compared to that of excess contributions tax. Additional interest charges would appear to remove this benefit.

Details and draft legislation on exactly how the higher rate of tax on contributions for high income earners measure will operate remain outstanding, other than the following:

  • The additional tax will be collected through a mechanism similar to that which operates for excess contributions tax.
  • ‘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 is 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, not the additional 15% tax.

 

5. Deeming on account based income streams – from 1 January 2015

The Government proposes extending to account based income streams the Centrelink deeming rules that currently apply to financial investments such as bank deposits, shares and managed funds.

Currently, the first $45,400 for a single pensioner and $75,600 for a pensioner couple of financial investments is deemed at 2.5% pa. Any financial investments over these thresholds are deemed at 4% pa.

Under the change announced, these standard Centrelink deeming rules would apply to superannuation account based income streams from 1 January 2015. However, all such products held before 1 January 2015 will be grandfathered and continue to be assessed under the existing deductible amount rules indefinitely, unless the pensioner chooses to change to another product.

GEM comment

Many retirees seeking to optimise their financial situation under the Centrelink means tests currently consider strategies involving non-deemed investments or seeking out returns on deemed assets in excess of the deeming rates. Traditionally, account based pensions have featured prominently in the first of these strategies.

Both the assets test and income test determine the actual amount of Centrelink pension payable to an individual. Taking both these tests into account, those clients most likely to be adversely affected by the proposed change are those whose account balances are:

  • greater than the point at which deemed income exceeds the income free area (currently $152 pf for a single person and $268 pf for a couple combined), but
  • less than the point at which the assets test determines the benefit paid. These asset levels are summarised in Table 2.

Table 2

 

Additionally, applying deeming to account based pensions may result in greater focus on other non-deemed investments, such as direct property.

6. Lost super – increased account balance threshold – from 31 December 2015

In the 2012—13 Mid-year Economic and Fiscal Outlook, the Government announced that super balances of inactive and uncontactable members below $2,000 must be transferred to the ATO from 31 December 2012. In addition, from 1 July 2013 it proposed paying interest at a rate equal to the CPI on all lost superannuation accounts reclaimed from the ATO.

The Government now proposes increasing the account balance threshold to $2,500 from 31 December 2015 and $3,000 from 31 December 2016.

 

The information contained in this Briefing is based on the understanding Colonial First State Investments Limited ABN 98 002 348 352 AFS Licence 232468 (Colonial First State) has of the relevant Australian laws and the joint media release of the Treasurer and Minister Shorten as at 5 April 2013. The Briefing should not be taken to indicate if, when or the extent to which, announcements will become law. While all care has been taken in the preparation of the Briefing (using sources believed to be reliable and accurate), no person, including Colonial First State, GEM Capital Financial Advice or any other member of the Commonwealth Bank group of companies, accepts responsibility for any loss suffered by any person arising from reliance on the information. The Briefing has been prepared for the sole use of advisers, is not financial product advice and does not take into account any individual’s objectives, financial situation or needs.

Published in Superannuation

 

 

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

 

 

 

Published in Tax Advice

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.

 

 

 

 

 

 

 

Published in Tax Advice

For people who are self employed or persons with substantial taxable income personal deductible contributions are a way of tax deductible contributions to superannuation reducing your taxable income leaving more after tax money for investment.

What is the strategy?

Making personal deductible contributions reduces a person’s taxable income because the contribution is claimed as a tax deduction.

The contribution is taxed at just 15% which may be less than the tax paid if taken as taxable income. This means more after-tax money is available for investment, which increases a person’s overall retirement benefits.

Who is suited to this strategy and why?

This strategy is suitable for individuals who are:

  • primarily self-employed as a sole trader
  • under age 65 and who have not been employed in the income year the contribution is made, or
  • employed, but the income earned from employment is less than 10% of their total income.

The benefits of making personal deductible contributions are:

  • personal income tax is reduced
  • retirement savings are increased, and
  • small business owners can diversify their wealth outside of their business.

 

How the strategy works?

Individuals who are eligible to make personal deductible contributions into superannuation can claim a tax deduction equal to the amount of contribution.

The tax deduction reduces the person’s taxable income thereby reducing income tax.

Personal deductible contributions are taxed at 15% upon entry into super. This means the individual making the contribution will ultimately pay tax at 15% on the contributed amount instead of at their marginal rate.

Notice of Deductibility

To be eligible to claim a deduction for contributions to super, an individual must lodge a Notice of Deductibility form with their superannuation fund by the earlier of:

  • the date the individual lodges their tax return for that financial year, or
  • the end of the following financial year.

The form must be lodged prior to commencing a pension, rolling the contribution over to another fund or withdrawing the contribution.

Example

Kate is age 40. She runs her own mining engineering consultancy business as a sole trader, earning $185,000 per annum.

Kate’s financial adviser has recommended she contribute $20,000 into her superannuation fund as a personal deductible contribution.

Kate is aware that she won’t be able to access the contribution until she meets a condition of release, but she is interested in building up her retirement savings in a tax-effective manner.

 

The following table shows that Kate has created a tax saving of $5,100 as a result of implementing the strategy. Her cash flow has reduced by $11,900 but she has saved $17,000 for retirement.

 

Cash Flow BeforeStrategy AfterStrategy
Gross salary $185,000 $185,000
Less personal deductible contributions $0 $20,000
Taxable income $185,000 $165,000
Tax on taxable income* $59,575 $51,475
After-tax income $125,425 $113,525
Superannuation
Personal deductible contributions $0 $20,000
Less contributions tax $0 $3,000
Increase to super $0 $17,000
Net Package $125,425 $130,525

* 2010/11 financial year. Includes relevant tax offsets and the 1.5% Medicare levy.

Risks and implications

  • Making personal deductible contributions to superannuation reduces a person’s cash flow.
  • Contributions to superannuation are preserved until a ‘condition of release’ is met.
  • Personal deductible contributions count towards a person’s concessional contribution cap, as do SG contributions and salary sacrificed contributions. Contributions in excess of the concessional contribution cap are taxed at 46.5% and count towards the non-concessional contribution cap.
  • Reducing taxable income too low can result in more tax being paid as the 15% contributions tax paid on deductible contributions may be higher than the individual’s marginal tax rate.
  • Individuals who have worked through the year must be certain that they satisfy the 10% rule prior to making the deductible contribution.
  • Changes in legislation may reduce the flexibility or benefits that superannuation currently enjoys.

Note: Advice contained in this flyer 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 May 2011.

Further information on Deductible Super Contributions can be found on our YouTube site which can be accessed via the website below:

Website:  www.gemcapital.com.au

 

or to arrange a no-cost, no-obligation first consultation, please contact the office on 08 8273 3222.

 

Blog Website:  www.investmentadviceadelaide.com

Published in Tax Advice