The New May Budget: How it Will Impact the Way You Lodge Tax, Part 1
The temptation, you see, in these early days of winter, what with the new May budget for 2011 delivered and pending legislation, the financial year less than a month to closing and tax planning season on the horizon, would be to bludge the hard work and lodge instead a serious discussion about the success of Aussie actresses in Hollywood.
The eye-boggling list grows yearly and all but careens off the tongue. Nicole, Cate, Naomi, Claudia, Toni, Miranda, Radha, Anna, Abbie, Teresa, Emilie with an e, Emily with a y, Yvonne, and the others: crikey, you could field an all girl roller derby team with them, a mighty fine one with Abbie as Jammer. So, what gives? Important inquiry no doubt, packed with pertinent questions for all matters regarding Australia tax. Can’t we fairly speak of Babe Bonus eligibility?
But no, the hour is dour, the budget beckons, and as usual it’s loaded with both good and bad, including this time around a notable lack of outright income tax cuts. In Part 1 of our report, we address the ways the new budget would affect taxation issues for individuals and families and suggest tips on how to mitigate some of its possible negative aspects. Part 2 deals with tax changes that pertain to students, small businesses and entrepreneurs. Walk with us through the thicket and you’ll be eligible to take the patented Aussie Actress Awareness Test™ courtesy of the Tax Rascal, our mate stateside, who’s known to keep a sharp eye on our sheilas in la-la land and beyond.
The avowed aim of federal budget 2011 is to return the country to surplus territory in two years. The focus on jobs is bolstered, the main purpose being to sharpen Australia’s edge in the newly minted Asian Century by getting Australians back in the workforce and coaxing them to obtain the education to do so. Some offsets are increased; others are phased out or rescinded. Thresholds are frozen in some cases, lifted in others. In addition, following the deadly natural disasters in 2010 and earlier this year, a one-off flood levy is imposed to enable reconstruction. However, carbon tax details remain thin on the ground.
New and modified levies
Let jump in starting with the levies applicable for the incoming financial year.
- The Flood & Cyclone Reconstruction Levy is a one-shot impost that is in effect only for 2011/12. It is meant to assist in the rebuilding of communities affected by the natural disasters that befell Australia during the past financial year. It is payable in line with the following income thresholds:
- There is no levy imposed on taxable incomes at or below $50,000.
- Individuals earning between $50,000 and $100,000 will pay 0.5% of the amount above the $50k threshold towards this levy.
- People who make more than $100,000 are required to pay the 0.5% that their earnings fall above $50k, that is $250, plus 1% of any amount above the $100k threshold. These individuals are also tabbed a separate and additional $250 levy. For those making above $200k this amount is $1250.
- Accordingly, an individual with $125K in taxable income would owe an additional $750 in tax solely as a result of the Flood levy.
Tip: While we do not advocate it, the impact of this one-off levy can be mitigated by striving to reduce one’s taxable income, either via deductions or increase in super contributions, or by deferring income to the following financial year or, alternatively, through salary sacrifice. Our financial advisers at elodge.com can provide expert assistance in this and other matters.
- The Medicare Levy lower threshold is shifted upwards to $18839 for individuals and $31789 for families effective from July 1st 2010, which is to say, it is increased for the current financial year. Taxpayers who are at or below these thresholds pay no levy at all. Those who are above the lower baseline but below or at the upper threshold pay part of the levy. Individuals who earn above the upper bracket are liable for the standard levy of 1.5% of their taxable income. In addition:
- The additional threshold amount for each dependent child or student is raised to $2919.
- The threshold for single pensioners below Age Pension is also increased to $30439.
Tip: Those whose taxable income falls close to the applicable thresholds do well to remember that a small downward shift in their taxable income, generally by way of deductions or otherwise, may mean a substantial reduction in their tax liability or, in the case of the lower thresholds, no amount levied at all.
- Starting with the pluses, Family Tax Benefit (A) payments will be extended to families with dependents aged 16 to 19 years old. This would match the payments rates for this age group to those of their younger siblings, 13 to 15 years of age, and boost the level of FTB support by up to $4208 a year (roughly $161 more per fortnight) for the 16 to 17bracket and up to $3741 for 18 to 19 years olds.
- Moreover, from July 1st 2001, recipients of FTB (A) who qualify will be given access to flexible advance payments of up to 7.5% of their entitlement, with a maximum of $1000, to address unexpected family related financial constraints at any point during the year. Fortnightly FTB payments would be prorated over six months to repay those advances.
- To begin with, for a family to benefit it must have its teenager enrolled in a full time secondary school or an equivalent vocational institution, another instance of this budget’s tenacious stress on education as the prelude for work.
- Further, the age at which eligibility for Family Tax Benefit (Part A) is ended is moved down from 24 years old to 21. This aligns FTB (A) with the Youth Allowance age of independence and represents savings of near $30 million over four years for the government.
- FTB supplements, currently at $726.35 for Part A and $354.05 for Part B, will not be indexed though the end of June, 2014; they will therefore remain unchanged for a temporary pause of three years.
- More controversially, the thresholds on higher income to obtain family benefits will also be frozen, again for three years, at the following levels:
- For FTB (B), the primary earner income will remain at $150k.
- The threshold for the Baby Bonus, paid to families in the six months following the birth or adoption of a child to help with the extra costs brought about by the new arrival, remains unindexed at $75k of family income.
- The Paid Parental Leave, taken at any time within the first year of a birth or adoption and paid the National Minimum Wage, is fixed for the primary carer at $150k of income earned in the financial year preceding the birth or adoption.
- The income-free threshold for FTB (A) at which the benefit payments begin to diminish is kept at $94,316, with $3796 provided for each additional child.
- From July 1st of this year, the DSTO will no longer be available to taxpayers with spouses under 40 years of age – that is, born on or after July 1st, 1971 – who are unemployed and childless. The phase-out follows the recommendations of the Henry tax review where the offset was broadly deemed a disincentive to work.
Exceptions would be made in the following cases:- The spouse is a carer.
- He or she is invalid or permanently unable to work due to disability.
- The couple has children and is eligible for FTB (B).
- The taxpayer is eligible for zone, overseas civilian, or overseas forces tax offsets.
Tip: the modified DSTO would represent a potential loss of $2286 based on current year calculation.
- In the first case, while there is no change to the current year $1500 LITO, with the threshold for the full offset at $30k and phase out ending at $67500, the portion distributed as reduced withheld tax is moved up from 50% to 70%, equivalent to an additional $300 being received throughout the year. This represents, at best, a small cash flow advantage.
- The second change to LITO applies only to unearned income such as dividends, interest, rent royalties, income from property, and trust distributions to children under 18 years of age. Under current rules, the low income tax offset allows a parent to stream a full $3333 from a family trust to a beneficiary child without tax liability. This is now seen as an encouragement to income splitting between adults and minors, not to mention as a loophole that enables the wealthy to reduce their tax burden by allocating a portion of their income to their children. From the 1st of July, 2011, the government would move to stave off this perceived abuse of the LITO, in the process netting an estimated saving of $740 million. It would do so by allowing only $416 of effective distribution from lifetime trust, above which the penalty tax for distribution of unearned income would come into full effect.
Changes to Family Tax Assistance
Moving on the always intricate issue of family assistance, there are some important changes in both parts A and B of the Family Tax Benefit package that we need to address as they will negatively impact some families, notably those earning higher incomes, while they benefit others.
All this government goodwill comes with a precondition and some important reforms:
On the other hand, confirming the Gillard government’s priorities, the lower income threshold for FTB (A), now set at just above $45k, will continue to be indexed, as will the threshold for the secondary income earner in FTB (B). It currently stands at $4745. All these proposed measures are expected to net a total of more than $1.2 billion in savings over the next four years.
Tip: As with the Medicare levy, falling just below or above the designated thresholds can mean a world of difference when it comes to obtaining the benefits. Taxpayers at the higher brackets specially may find it profitable to jettison a small pay raise, perhaps opting for another form of compensation. Even families who stand to benefit under the proposed changes should keep a wary eye on the Reserve Bank as another hike in the interest rates may well cancel some of the advantages gained from the budget. Again, the elodge.com advisors can point you in the right direction.
Important changes to key tax offsets
As previously mentioned, this year’s budget is strongly focused on work and the education needed to make Australians employable. $47.1 million towards a teen parent plan linking social security payments to the completion of school year 12 by the time his or her child is one; $68 million to provide kids who leave school too early with basic employability skills; $95 million for business owners who hire people who have been unemployed for an extended time; $200 million towards mentoring to enable people to complete their apprenticeships; a whopping $558 million to create 130,000 training places aimed at getting the “disengaged” youth back to work: all hammer at the stated goal.
The clearest indication, in tax terms, that the Gillard government is intent on solving the current labor shortage by drafting more able bodies into the workforce lie in the proposed change to the Dependent Spouse Tax Offset (DSTO). Namely:
Another tax offset issue that falls under the aptly named Building Australia’s Future Workforce heading in the 2011 federal budget is the Low Income Tax Offset (LITO). Changes to LITO are twofold and best understood separately. The first, small modification relates to how the offset is distributed, the second, rather more substantial, to who can no longer rightly claim it.
Tip: Please note that the new rules would not apply to testamentary trusts which taxpayers should consider opening. Of course, they may also think of taking full advantage of the current distribution quota before the modification to LITO becomes law.
Additional outlays for the Education Tax Refund
Starting on July 1st, 2011, the government proposes to expand the list of school related items that can be claimed as expenses under the Education Tax Refund to include school uniforms. Expenses that are currently eligible include: the cost of buying and maintaining such items as computers and related equipment; the expense incurred providing for a home internet connection; and the cost of textbooks etc. In all cases, remember to hold on to the receipts for all your purchases.
