2013 Federal Budget Summary

2013 FEDERAL BUDGET SUMMARY

The 2013 Federal Budget was the 6th Budget delivered by the current Treasurer and incumbent Government. Delivered exactly 4 months out from the next Federal election, it may prove to be their “swan song”.
The announcements made on 14 May 2013 were largely non-surprising with virtually all major announcements (from a financial planning perspective) having been rumoured and confirmed in the days and weeks leading up to this night.
The key Budget measures and announcements are summarised below:

TAXATION

Deferral of changes to personal income tax regime
Deferred from 1 July 2015 until certain requirements met
Announced in the week before the 2013 Budget, the changes to personal marginal tax rates and thresholds has been deferred from their intended start date of 1 July 2015. Funding for these changes was linked to the price for carbon and the revenue expected to be generated from the Carbon Pricing Scheme. As the projected price of carbon is lower than initially expected, the changes in personal tax rates and thresholds will not commence until the price of carbon in a future Budget is estimated to be above $25.40. Based on current projections, this will not be until at least 1 July 2018 and may be later.
The current and future thresholds are shown in the following table:

Whilst not specifically stated, it is expected the previously announced and legislated changes to the low income tax offset will also be deferred until the same thresholds are reached.

Increase in the Medicare levy low income thresholds
Effective date: 1 July 2012

The Government has announced new Medicare levy thresholds that are applicable for the current financial year (ending 30 June 2013). These are $20,542 for individuals (previously $19,404) and $33,693 for families (previously $32,743). The increase on these thresholds for each dependent child or student will be $3,094.
The low income threshold for single pensioners below age pension age has been increased to $32,279 for the year ending 30 June 2013. This will ensure such pensioners do not pay the Medicare levy when they do not have an income tax liability.

Increase in the Medicare levy for DisabilityCare Australia
Effective date: 1 July 2014
As announced in the lead up to the Federal Budget, the Government will increase the rate of the Medicare levy by 0.5% from 1.5% of taxable income to 2.0% of taxable income with effect from 1 July 2014. This increase will be used to fund DisabilityCare Australia (previously known as the national disability insurance scheme or NDIS).
This increased levy will apply to all taxpayers who are subject to the Medicare levy based on their taxable income, and will result in a reduction of after tax income. The following table shows the additional amount of overall tax that will be payable on certain levels of taxable income:

Net Medical Expenses Tax Offset
Effective date: 1 July 2013
After making significant reforms to the Net Medical Expense Tax Offset (NMETO) in the 2012 Budget (including the proposed introduction of means testing and a reduction in the amount claimable), the Government has now decided that from 1 July 2013 the NMETO will be phased out completely.
Whilst the NMETO will continue to be available until 30 June 2019 for out of pocket medical expenses related to disability aids, attendant care or aged care expenses, it will only be available for the year commencing 1 July 2013 if a claim is made for the current year (i.e. the year ended 30 June 2013). If a claim is made in the year commencing 1 July 2013, then it will also be available in the year commencing 1 July 2014, but not thereafter.
Importantly, any claims to be made in the years commencing 1 July 2012, 2013 or 2014 will still be subject to means testing thresholds introduced in the 2012 Budget.

Limitations on deductions for work-related self-education expenses
Effective date: 1 July 2014
Announced on 13 April 2013, an annual cap on the deduction for work-related self education expenses will apply from 1 July 2014. Deductions will be limited to $2,000 per annum.
This change applies to individuals seeking to claim such deductions, and may have a significant impact on self employed people running their own businesses. It may lead to a trend to corporatise such businesses so as to not limit the deduction. This is because where the expense is paid by an employer on behalf of an employee, the benefit is exempt from fringe benefits tax (FBT) and the employer is entitled to a full deduction.
However, the Government has indicated that where an employee now chooses to salary sacrifice towards these forms of education expenses, the FBT exemption will no longer apply.

Changes for non-resident taxpayers on sale of Australian property
Effective date: 1 July 2016
With effect from 1 July 2016, where a non-resident sells a property located within Australia, a new (non-final) withholding tax regime will apply. This measure is designed to ensure that the appropriate amount of tax is recovered by the Australian Government on taxable capital gains that arise when such properties are sold.
These measures will apply to all Australian taxable property, other than:
• where the property is owned and sold by an Australian resident (ie it applies to non-resident taxpayers only)
• residential properties valued at less than $2.5 million.
Under this measure, the purchaser of the property will need to withhold 10% of the purchase price and forward it to the ATO as a form of withholding tax. As a result, the vendor will only receive 90% of the sale proceeds up-front. They will need to lodge a tax return if they want to receive any of the remaining 10%.

Targeting dividend washing arrangements
Effective date: 1 July 2013
The Government intends to legislate to close an existing loophole in the dividend imputation rules that may currently be targeted by “sophisticated” investors.
Whilst the Government has indicated it will consult on the development of the relevant legislation, the intent is to prevent a “dividend washing” arrangement whereby an investor sells a parcel of shares ex-dividend and then immediately purchasing an identical parcel of shares cum-dividend (i.e. still carrying the right to a dividend). This practice currently enables some investors to qualify for a doubling of their franking credit entitlements. Under the proposed measure, only one set of franking credit entitlements may arise.
Whilst intended to only apply to “sophisticated” investors, the actual qualification criteria indicated by the Government is that it will apply to investors with franking credit entitlements in excess of $5,000 on a single stock parcel. As a result, its application may be wider than first anticipated.

Removal of discount for early HELP payments
Effective date: 1 July 2014
Currently discounts are available for up-front and voluntary payments made under the Higher Education Loan Program. These discounts currently are:
• 10% for students electing to pay their student contribution up-front; and
• 5% on voluntary payments to the ATO of $500 or more.
From 1 January 2014, these discount arrangements will be removed.

SUPERANNUATION
No extension of draw-down relief for income streams
Effective date: 1 July 2013
Conspicuous by its absence, the Government has not announced any further extension of the minimum draw down relief for superannuation income streams. In recognition of the constrained markets at the time, over the last few years the Government has granted relief on minimum pension payment drawdowns, with a 25% reduction applying to the current financial year.

In the absence of any subsequent announcements, minimum pension drawdowns will return to their standard level from 1 July 2013 as shown in the following table:

Higher tax on concessional contributions for high income earners
Effective date: 1 July 2012Previously announced in the 2012 Budget and recent the subject of draft legislation released for consultation, individuals with “total income” in excess of $300,000 will be subject to an additional 15% tax on their concessional contributions into superannuation up to their relevant concessional contribution cap limit.
In this year’s Budget, the Government has announced some minor technical amendments to the measure (and addressed in the draft legislation). These minor amendments include:
• Exempting certain employer contributions for Federal Judges sitting on or after 1 July 2012 and certain employer contributions made to constitutionally protected funds.
• Amending the definition of “total income” to that used for calculating liability for the Medicare levy surcharge.
The draft legislation released for comment has also confirmed that this additional tax will be collected via a mechanism similar to that currently applying to excess contributions tax.
It will also be important to be aware that the potential for this additional tax will also apply to the higher concessional cap of $35,000 proposed for those aged 60 and above from 1 July 2013 and those aged 50 and above from 1 July 2014.

Changes to tax free treatment of superannuation in pension phase
Effective date: 1 July 2014
As previously announced on 5 April 2013, the existing tax free treatment applying to assets supporting a superannuation income stream will be limited to the first $100,000 of earnings on those assets. Any earnings above that limit will be subject to the standard 15% tax rate applying to complying superannuation funds. The $100,000 threshold will be indexed to CPI and increase in $10,000 increments.
Transitional rules will apply in respect of capital gains that accrue on assets acquired before the commencement of this measure (i.e. pre 1 July 2014). These rules are as follows:
• For assets acquired prior to these announcements (i.e. pre 5 April 2013), any capital gains realised (as a result of the assets being sold by the superannuation fund) before 1 July 2024 will remain tax free and will not be included in the calculation of the $100,000 threshold. Where the asset is sold after that time, only the gain that accrues from 1 July 2024 is included in the calculation.
• For assets acquired between 5 April 2013 and 30 June 2014, individuals will have the choice to apply the reform to the entire gain on disposal, or only that part of the gain that accrues from 1 July 2014.
• For assets acquired on or after 1 July 2014, the entire capital gain will be included in the calculation.
Whilst not providing details on how this tax will be collected when it applies, the Budget announcements have confirmed that the $100,000 threshold applies across all pension accounts held by an individual – not per pension account.

Changes to concessional contribution caps
Effective date: 1 July 2013
As announced on 5 April 2013, from 1 July 2013 a higher concessional contribution cap of $35,000 will apply to people aged 60 and over. This higher cap will then become available to people aged 50 and over from 1 July 2014.

This cap will not be indexed in future years, and it is projected that the existing $25,000 concessional cap will reach $35,000 in July 2018. At that time, the same cap will again apply to everyone regardless of age.
Whilst this higher cap is less than that previously due to come into effect from 1 July 2014 (being $50,000), the requirement to have less than $500,000 in total superannuation savings has been removed.
Draft legislation for this measure has been released, which contains an important technical amendment, with qualification being based on the individual’s age at the 30 June preceding the start of the relevant financial year. This ensures that in a year where a member dies before reaching the qualification age in that year, they will be eligible for the higher cap.

Changes to excess concessional contributions
Applies to excess concessional contributions made from 1 July 2013From 1 July 2013, individuals will have the ability to withdraw any excess concessional contributions and have them taxed personally at their marginal tax rate. An interest charge would also apply to the excess amount, reflecting the delay in the collection of the relevant tax by the Australian Taxation Office (ATO).
This will replace the current limited withdrawal option which is only available where clients exceed their cap by less than $10,000 and is only available once. The new measure can be used each time a client exceeds their concessional contributions cap.

Extending concessional tax treatment to deferred lifetime annuities
Effective date: 1 July 2014From 1 July 2014, the Government will extend the concessional tax treatment applying to superannuation to deferred lifetime annuities. These investments currently attract the same tax free treatment as superannuation income streams once payments commence, but are still subject to 15% tax on earnings during the deferral period.
Under the announcement, the tax free status will also apply during the deferral period.
This measure was previously announced with other superannuation reforms on 5 April 2013.

Additional reforms for lost super
Effective date: 31 December 2015
In the 2012/13 Mid Year Economic & Fiscal Outlook (released in October 2012), the Government announced that the account balance threshold for inactive accounts and accounts of uncontactable (i.e. lost) members required to be transferred to the ATO would increase to $2,000 and interest would be paid on these accounts at a rate equivalent to the CPI inflation.
The Government has announced it will now increase the threshold to $2,500 from 31 December 2015 and then to $3,000 from 31 December 2016
This change will increase the number of accounts transferred to the ATO, but may assist in consolidating more lost accounts and aiding clients to find their lost super.

Low income superannuation contributions
Effective date: 1 July 2012
The low income super contribution was introduced with effect from 1 July 2012 and essentially provides a refund of the 15% contributions tax for those on incomes of up to $37,000.
Under the existing rules, if the amount of low income super contribution a person was eligible for was less than $20, no payment would be made.
This technical issue has been amended, so that anyone on an income up to $37,000 and otherwise eligible will have the payment made to their super fund. Where the amount of the payment is calculated as less than $10, the entitlement will be rounded up to $10.

SOCIAL SECURITY & WELFARE PAYMENTS

Deeming superannuation account based income streams
Effective for new income streams commencing from 1 January 2015
For Centrelink income test purposes, superannuation income streams are concessionally treated as a result of the calculation of a “deductible amount” that reduces the income amount assessed for benefit calculation purposes.
This concession will continue indefinitely for existing income streams. However, new superannuation account-based income streams starting on or after 1 January 2015 will be assessed under deeming arrangements applying to other financial investments.
This change is in line with a recommendation from the previous Australia’s Future Tax System Review (Henry review), and was previously announced on 5 April 2013.

Continued pausing of indexation of Child Care Rebate
Effective date: 1 July 2013For a further three years, the Government will freeze any indexation of the Child Care Rebate. The maximum level of rebate that can be paid in a year will remain at $7,500 until 30 June 2017. This won’t reduce the level of payment currently available, nor change the method of calculation, but correspondingly won’t lead to an increase in entitlements.

Increased level of income before allowance payments reduced
Effective date: 20 March 2014Currently, allowance recipients can earn $62 per fortnight before there is reduction in the amount of the allowance payment they can receive. For the first time in over ten years, this threshold will be lifted. With effect from 20 March 2014, the threshold will increase by $38 per fortnight to $100 per fortnight. This equates to an annual increase in income under the income free threshold of $988.
In addition, from 1 July 2015, this new $100 threshold will also be indexed annually in line with movements in the CPI.
The payments impacted by these changes are Newstart Allowance, Sickness Allowance, Parenting Payment Partnered, Widow Allowance, Partner Allowance Benefit and Partner Allowance Pension.

Reduction in time overseas before payments are impacted
Effective date: 1 July 2014Currently, it is possible for certain benefit recipients to be temporarily absent from Australia for up to three years before benefit payments cease. From 1 July 2014, this will be reduced to one year for certain payments, including Family Tax Benefit Part A, Schoolkids Bonus and Paid Parental Leave.

Continued indexation pausing on certain benefit thresholds
Effective date: 1 July 2013For a further three years (until 30 June 2017), the Government will pause any further indexation of the higher income thresholds for family payments and supplement amounts.
The existing $150,000 upper income test limit for Family Tax Benefit Part B, dependency tax offsets, Paid Parental Leave Scheme and Dad and Partner Pay will remain. The Family Tax Benefit Part A upper income free area will remain at $94,316 plus an additional $3,796 for each child after the first.

Replacement of existing Baby Bonus
Effective date: 1 July 2014From 1 July 2014, the existing Baby Bonus scheme will be removed. Instead, for families eligible for Family Tax Benefit Part A, increased benefits of $2,000 will be paid in the year following the birth (or adoption) of a child, and a $1,000 increase for second or subsequent children. The additional amounts will be paid as an upfront payment of $500 with the remainder to be spread over the next seven fortnightly payments.
The increase in Family Tax Benefit Part A will not be available for parents who have taken up the Paid Parental Leave option, but they will qualify for improved access to the Paid Parental Leave for subsequent children.
As an additional measure to make it easier for working mums with children born in close succession to qualify for Paid Parental Leave for subsequent children, the government will allow parents to count periods of government paid parental leave as work under the work test.

Changes to age eligibility for Family Tax Benefit Part A
Effective date: 1 January 2014From 1 January 2014, the age at which Family Tax Benefit Part A payments will cease in respect of children aged 16 and over will change. Payments will cease at the end of the year when the child completes schooling.
Individuals who no longer qualify may instead be eligible to receive the Youth Allowance.

Family Tax Benefit and Child Care Assistance tax claims
Effective from the 2012/13 FYFamily Tax Benefit and Child Care Assistance can be claimed through the income tax return process. From the 2012/13 financial year, families will have 12 months from the end of the financial year to file their claim rather than the current 24 months.

Pension Bonus Scheme closure
Effective date: 1 March 2014The Pension Bonus Scheme ceased to be available for those of age pension age from 20 September 2009. However registration is still possible for persons who were of age pension age as at 19 September 2009.
Under this new measure, no new registrations will be accepted from 1 March 2014. The Work Bonus remains available for those of age pension age who continue to participate in employment.

Pilot programme for Age Pension recipients downsizing their principal residence
Effective date: 1 July 2014 to 1 July 2017The Government will implement a 3 year pilot programme aimed at removing the Social Security disincentive for Age Pension recipients to downsize their principal residence. Under this measure, up to $200,000 of the proceeds from a principal residence sale may be deposited into a ‘special account’ (providers must be an authorised deposit taking institution, but other details are currently unknown). These accounts (including future earnings) will receive an exemption from Age Pension income and assets tests for up to 10 years.
To obtain access to the scheme, the following requirements must be met:
• At least 80% of the ‘excess’ sale proceeds (up to $200,000) must be deposited into a ‘special account’.
• The principal residence sold must have been owned by the Age Pension recipient for at least 25 years.
• The Age Pension recipient must move into a new principal home, granny flat, or retirement village (i.e. it is not available to those who move into residential aged care).
• The means test exemption ceases if the account holder makes any withdrawals from the account.

Extension of the Pensioner Education Supplement for single parents
Effective date: 1 January 2014The Government announced an extension of the Pensioner Education Supplement (PES) of up to $62.40 per fortnight to all Newstart Allowance (NSA) single principal carer recipients. This measure expands on the current arrangement that limits access to the PES to single principal carer recipients of NSA who were receiving the supplement prior to transitioning off Parent Payment single.

Extended Pensioner Concession Card entitlements for single parents
Effective date: 1 January 2014
Single parents who become ineligible for parenting payment due to the age of their youngest child and who do not qualify for any other income support payment due to employment income will no longer immediately lose access to the Pensioner Concession Card. The budget measures allow eligible single parents to retain eligibility for a period of 12 weeks.

SUMMARY

Overall, it was a Budget with many small measures, but no significant changes of any magnitude that weren’t already known. In an election year, it was perhaps lacking for the expected concessions that are often promised as part of an election pitch. For many, it may actually prove to be a tough Budget with more to be paid in the future. However, this appears to be what the Government was actually aiming for – a socially and economically responsible Budget (where expenditures equated to revenues) as a step to trying to return the Budget to surplus in the future.

It’s always important to remember that virtually all measures announced will still need legislation to be introduced, and will have to pass through Parliament, so the final version of the changes may differ to the announcements made in the Budget. Some of the measures have already been released in draft legislative format for comment, but no draft legislation is guaranteed to be passed in what will be a very limited and busy sitting time for the Parliament before it ceases on 11 August in advance of the September election.

As part of our ongoing service, we will review existing client files to determine whether the proposed changes will impact you. If so, we will be in touch with you in due course.

That said, should you wish to discuss the proposed changes sooner, please feel free to contact our office on (03) 9336 7800.

Best wishes,

RetireCare Personal Wealth Management