2014 Federal Budget Analysis

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1 For adviser use only. Not for public distribution Federal Budget Analysis In one of the more highly anticipated Federal Budgets, the Government announced major changes that should be discussed with your clients. Contents Note: The changes announced are proposals only and may or may not be made law. SUMMARY 1 PERSONAL TAXATION 2 Temporary levy for higher earners 2 Temporary increase in FBT rate 2 HELP debt changes 2 Private Health Insurance changes 2 Tax offsets to be abolished 3 Family Medicare levy threshold 3 SUPERANNUATION 3 Excess non-concessional contribution withdrawals 3 Revised SG rate increase 3 Cessation of First Home Saver Accounts scheme 4 SOCIAL SECURITY 4 Increase in Age Pension age to 70 4 Income support payment indexation 4 Deeming rate thresholds 5 Eligibility threshold freezes 5 Increasing cost of medical care 6 Extending one week waiting period 6 Family Tax Benefit changes 6 Participation requirements for job seekers under 30 7 Eligibility age for Newstart and Sickness Allowance 7 Disability Support Pension portability 7 Disability Support Pension changes for under 35s 7 CSHC indexation 7 CSHC income definition 8 Cessation of the Seniors Supplement 8 SUMMARY A Temporary Budget Repair Levy of 2% will be payable on taxable incomes over $180,000 pa for the next three financial years. The levy will increase the Fringe Benefits Tax rate to 49% for three years, starting on 1 April Changes to HELP debts will increase the amount payable and payments will be made at lower income levels. The income thresholds determining the Private Health Insurance Rebate and Medicare Levy Surcharge will not be indexed for three years, starting on 1 July The Dependent Spouse and Mature Age Worker Tax Offsets will be abolished from 1 July People who make non-concessional super contributions from 1 July 2013 that exceed the cap will have the option to withdraw the excess amount plus earnings on the excess. The timeframe for increasing the Superannuation Guarantee contribution rate to 12% will be amended. The Age Pension age will gradually increase to 70. The deeming thresholds will reduce from 20 September A range of changes to Family Tax Benefit Part A and B will reduce the number of people who are eligible and, for some, lower the entitlements. The Commonwealth Seniors Health Care Card thresholds will be indexed from 20 September The definition of income for the Commonwealth Seniors Health Care Card will be expanded. From 1 January 2015, an amount will be included in the income test, based on an account-based pension being subject to deeming Federal Budget Analysis 1

2 PERSONAL TAXATION Temporary levy for higher earners Date of effect: 1 July 2014 A Temporary Budget Repair Levy of 2% will be payable on taxable incomes over $180,000 pa for the next three financial years. This levy will effectively increase the top marginal tax rate to 49%, including the Medicare levy. From 1 July 2017, the top marginal rate will be 47%, including the Medicare levy. The table below illustrates the potential increase in tax payable in 2014/15 for a range of higher incomes. These figures take into account the Temporary Budget Repair levy and the 0.5% increase in the Medicare levy that is already legislated to apply from 1 July Illustrative tax increases in 2014/15 Taxable income $200,000 $250,000 $300,000 $350,000 $400,000 Extra 0.5% Medicare levy as legislated $1,000 $1,250 $1,500 $1,750 $2,000 2% Temporary Budget Repair Levy $400 $1,400 $2,400 $3,400 $4,400 Extra tax compared to 2013/14 $1,400 $2,650 $3,900 $5,150 $6,400 It is important to note that the levy is stated to apply to taxable income. Strategies that reduce taxable income could provide a benefit for the period of the levy. Examples include negative gearing, as well as salary sacrifice and personal deductible super contributions. The temporary increase in the top marginal tax rate should make concessional super contributions relatively more attractive for clients earning over $180,000 pa. For incomes between $180,000 and $300,000, the difference in the personal tax rate and the tax rate on concessional super contributions will be 34%. For incomes above $300,000 the difference will be 19%. A number of other tax rates that are based on the top marginal tax rate will also be increased for three years. Temporary increase in FBT rate Date of effect: 1 April 2015 In line with the introduction of the Temporary Budget Repair Levy, the Fringe Benefits Tax (FBT) rate will increase by 2% to 49% for two FBT years from 1 April While the levy on taxable incomes only applies to higher income earners, the FBT rate increase will impact a wide range of taxpayers, as it applies to all taxable fringe benefits, except those that are exempt. HELP debt changes Date of effect: 1 June 2016 and 1 July 2016 HELP debts will accrue interest at the 10 year Government bond rate from 1 June 2016, subject to a maximum rate of 6%. Currently, HELP debts are indexed to the Consumer Price Index. With the change to a market rate of interest, HELP debts will no longer be a cheap form of funding and there may be an increased incentive for students or their families to pay fees upfront or voluntarily repay debts early. In addition, from 1 July 2016, HELP debts will start to be repayable at a lower threshold. This threshold will be 90% of the minimum threshold that would otherwise apply. The threshold is estimated to be $50,638 and the repayment rate will be 2% of taxable income. This will create a new repayment band for HELP debts. Private Health Insurance changes Date of effect: 1 July 2015 The income thresholds determining the Private Health Insurance Rebate and Medicare Levy Surcharge will not be indexed for three years, starting in 2015/16. During this period, an increasing number of clients will be pushed through these thresholds as their incomes rise. This will result in a lower rebate or higher surcharge amount Federal Budget Analysis 2

3 Tax offsets to be abolished Date of effect: 1 July 2014 The Dependent Spouse and Mature Age Worker Tax Offsets are currently being phased out. The phase out will cease and the 2013/14 tax year will be the last year in which these offsets will be available. Family Medicare levy threshold Date of effect: 1 July 2013 The Family Medicare levy income threshold in 2013/14 will be $34,367. The additional amount for each dependant student will be $3,156. The thresholds for individuals and pensioners will not be indexed in 2013/14. SUPERANNUATION Excess non-concessional contribution withdrawals Date of effect: 1 July 2013 Individuals who make contributions exceeding their non-concessional contribution cap from 1 July 2013 will have the option to withdraw the excess amount, plus earnings on the excess. No tax will be payable on the excess amount withdrawn. However, withdrawn earnings will be taxed at the individual s marginal tax rate. If no election is made to withdraw the excess contributions, the excess will be taxed under the existing regime at the top marginal tax rate. There will be further consultation with key superannuation industry stakeholders before details of this measure are finalised. Revised SG rate increase Date of effect: 1 July 2014 While the Superannuation Guarantee (SG) rate will still increase to 12%, the schedule for this increase will be amended. The Minerals Resource Rent Tax Repeal and Other Measures Bill 2013 (MRRT) failed to pass the Senate in March This Bill included provisions for pausing the SG rate at 9.25% for 2014/15 and 2015/16. Thereafter, it was proposed that the rate would progressively increase until it reached 12%. The Government confirmed that the legislated increase to 9.5% will take effect on 1 July It is proposed that the rate will remain at 9.5% for four years and from 1 July 2018, it will increase by 0.5% pa, before reaching 12% on 1 July 2022 (a year later than originally scheduled). Financial Year SG Rate 2014/15 9.5% 2015/16 9.5% 2016/17 9.5% 2017/18 9.5% 2018/19 10% 2019/ % 2020/21 11% 2021/ % 2022/23 12% 2014 Federal Budget Analysis 3

4 Cessation of First Home Saver Accounts scheme Date of effect: First Home Saver Accounts (FHSAs) opened any time after Budget night will no longer qualify for concessions. From 1 July 2014, the Government co-contribution that is currently paid to these accounts at a rate of 17% of personal contributions made per financial year (to a maximum of $1,020 per year) will cease. From 1 July 2015, the existing tax concessions and social security income and assets test exemptions applied to these accounts will end. Restrictions on withdrawals will also cease from 1 July SOCIAL SECURITY Increase in Age Pension age to 70 Date of effect: 1 July 2025 The Age Pension age will increase to 67.5 from 1 July It will then continue to rise by six months every two years, until the pension age reaches 70, by 1 July Date Age Pension age 1 July July July July July July Clients born before 1 July 1958 will not be affected by this change. Currently, the Age Pension age is due to increase from 65 starting on 1 July 2017 and gradually reach 67 by 1 July Income support payment indexation Date of effect: 1 July 2014 and 1 September 2017 The indexation rate will change to the Consumer Price Index (CPI) for a number of payments. The indexation change will apply to the Parenting Payment (Single) from 1 July Indexation changes from 1 September 2017 will apply to: Pensions (including Age Pension, Disability Support Pension, Carer Payment and DVA service pensions), and Bereavement Payment. Payments are currently indexed in line with the higher of: CPI Male Total Average Weekly Earnings, or Pensioner or Beneficiary Living Cost Index. Generally CPI is the lowest of these Federal Budget Analysis 4

5 Deeming rate thresholds Date of effect: 20 September 2017 The table below highlights the changes to the deeming thresholds from 20 September Family situation Deeming thresholds Current Proposed Single $46,600 $30,000 Couple $77,400 $50,000 The lowering of the thresholds will increase the amount of financial investments subject to the higher deeming rate. This will result in a reduction in entitlement if the client is assessed under the Income Test. Based on the current deeming rates, the following table shows the deemed income where a client has $250,000 of financial investments. Family situation Deemed income pa Current rules Proposed rules Single $8,051 $8,300 Couple $7,589 $8,000 Assuming that the income free threshold has already been utilised, the increase in deemed income would result in a reduction in the fortnightly Age Pension of $4.79 (for a single) and $7.90 combined (for a couple). Eligibility threshold freezes Date of effect: 1 July 2014 and 1 July 2017 The eligibility thresholds for non-pension payments will be frozen for three years from 1 July Non-pension payments include: Family Tax Benefit Child Care Benefit Child Care Rebate Newstart Allowance Parenting Payments, and Youth Allowance. Eligibility thresholds for pension payments will be frozen for three years from 1 July Pension payments include: Age Pension Carer Payment Disability Support Pension, and DVA Service Pension Federal Budget Analysis 5

6 Increasing cost of medical care Date of effect: 1 July 2015 and 1 January 2015 A patient contribution of $7 may be charged from 1 July 2015, for: general practitioner consultations, and out-of-hospital pathology and diagnostic imaging services. Holders of concessions cards and children under 16 years of age can only be charged for the first 10 visits in a year. Visits beyond the first 10 will require no patient contribution. This announcement also lifts the restriction on State and Territory Governments charging patients at hospital emergency departments for general practitioner like consultations. Co-payments under the Pharmaceutical Benefits Scheme will increase from 1 January 2015 by: $5 for general patients from $37.70 to $42.70, and $0.80 for concessional payments from $6.10 to $6.90. The safety net threshold will increase from 1 January 2015 for four years by 10% each year and the concessional safety net by two prescriptions per year. The combination of these two measures will result in an increase in the cost of receiving medical care. Extending one week waiting period Date of effect: 1 October 2014 Currently, a one week waiting period applies before a client can receive Newstart Allowance or Sickness Allowance. From 1 October 2014, this waiting period will apply to: Parenting payment Widow allowance, and Youth Allowance. This waiting period will be served in addition to other waiting periods (such as the Liquid Assets Waiting Period) and not concurrently. Family Tax Benefit changes Date of effect: Various A number of amendments have been announced in relation to eligibility and payment rates for the Family Tax Benefit (FTB), and associated supplements and allowances. Payment rates From 1 July 2014, the maximum and base rates of the FTB Part A and B will be frozen until 1 July The FTB Part A and B end of year supplements will be returned to their original values and indexation will cease from 1 July The supplements will reduce from: $ to $600 for FTB Part A, and $ to $300 for FTB Part B. Eligibility thresholds The FTB Part A per child add-on, which currently increases the higher income free threshold for each additional child, will be removed from 1 July Under existing arrangements, a family may qualify for FTB Part B if the primary income earner has income up to $150,000 pa. This will be reduced to $100,000 pa from 1 July Federal Budget Analysis 6

7 Eligibility From 1 July 2015, payment of FTB Part B will be limited to families whose youngest child is under the age of six. Families already in receipt of FTB Part B, whose youngest child is aged six or over on 30 June 2015 will remain eligible for FTB Part B under the transitional measures for an additional two years. Other changes From 1 July 2015, a new Family Tax Benefit Allowance will be made available to single parents receiving the maximum rate of FTB Part A, whose youngest child is aged 6 to 12. This will apply from the time they become ineligible for FTB Part B. An additional payment of $750 will be paid for each child aged 6 to 12. Participation requirements for job seekers under 30 Date of effect: 1 January 2015 From 1 January 2015, new applicants for Newstart Allowance and Youth Allowance who are under age 30 must demonstrate appropriate job search and participation in employment services support for six months prior to receiving the support payments. After six months, recipients will be required to participate in 25 hours per week of Work for the Dole to continue receiving the support payment. Certain individuals will be exempt from the requirements, such as those with partial work capacity, the principal carer of a child and those in certain education or job seeking programs. Eligibility age for Newstart and Sickness Allowance Date of effect: 1 January 2015 From 1 January 2015, the eligibility age for Newstart Allowance and Sickness Allowance will increase from age 22 to 25. Recipients receiving these payments as at 31 December 2014 will continue to receive the allowance. Disability Support Pension portability Date of effect: 1 January 2015 The Disability Support Pension (DSP) will only be payable to a person who is absent from Australia for a maximum of four weeks in a 12 month period. This will apply to all DSP recipients leaving Australia on or after 1 January Extensions or unlimited portability will still apply under special circumstances, such as terminal illness or permanent and severe disability with no future work capacity. Disability Support Pension changes for under 35s Date of effect: 1 July 2014 From 1 July 2014, certain recipients of DSP under age 35 will be required to undertake compulsory work focused activities. This measure is focused on assisting recipients to improve their chances of obtaining employment. Some DSP recipients under age 35 who were granted the payment between 1 January 2008 and 31 December 2011 will have their work capacity reassessed under the current impairment tables. Additional support will be provided to assist these recipients in improving their work capacity. CSHC indexation Date of effect: 20 September 2014 The income thresholds for eligibility for the Commonwealth Seniors Health Care Card will be indexed from 20 September 2014 to the Consumer Price Index. Indexation may allow additional clients to become eligible for this card Federal Budget Analysis 7

8 CSHC income definition Date of effect: 1 January 2015 The definition of income for the Commonwealth Seniors Health Care Card will be expanded. From 1 January 2015, an amount will be included in the income test based on an account based pension being subject to deeming. This brings the treatment in line with the deeming of income streams for social security recipients. Grandfathering rules will apply to those clients already eligible for the CSHC. The new rules will apply to new applications from 1 January Cessation of the Seniors Supplement Date of effect: 20 September 2014 From 20 September 2014, the Seniors Supplement will no longer be payable to holders of the Commonwealth Seniors Health Care Card. However, holders of the card will still receive the Clean Energy Supplement. The current annual rates of Seniors and Clean Energy supplements are: Payment Single Couple (each) Seniors Supplement $ $ Clean Energy Supplement $ $ The Clean Energy Supplement will not be indexed from 1 July This supplement is payable to both income support recipients and CSHC holders. References Budget Papers Contact details For further information, please contact MLC Technical Services on Important information This document was prepared by MLC Limited ABN (AFSL number ) without taking into account any particular person s objectives, financial situation or needs. It is solely for use of financial advisers and it is not intended for distribution to investors. It is not guaranteed as accurate or complete and should not be relied upon as such. MLC Limited does not accept any responsibility for the opinions, comments and analysis contained in this document, all of which are intended to be of a general nature. Accordingly, reliance should not be placed by anyone on this document as the basis for making any investment, financial or other decision. Investors should, before acting on this information, consider the appropriateness of this information having regard to their personal objectives, financial situation or needs. We recommend investors obtain financial advice specific to their situation before making any financial, investment or insurance decision. MLC Limited, Miller Street, North Sydney, NSW 2060, is a member of the National Australia Group of companies. MLC is not a registered tax agent. If you wish to rely on this to determine your tax obligations you should speak to a registered tax agent. MLC companies are subsidiaries of National Australia Bank Limited ABN An investment with MLC is not a deposit or liability of, and is not guaranteed by, National Australia Bank Limited M Federal Budget Analysis 8

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