Federal Budget Update 2010

Federal Budget Update 2010 While the 2010 Federal Budget contained relatively few surprises, the government announced some superannuation and taxation changes that may be of interest to members. Importantly, the government confirmed its intention to adopt key Henry review recommendations, which were first announced last week.

Please note: All Budget measures are subject to the passage through Parliament of the necessary legislation.

Superannuation changes

Reduced government co-contributions

Effective date: 1 July 2012

The Government will permanently set the matching rate for co-contributions at 100%, up to $1,000. This overrides the measure announced in last year's Federal Budget to reduce the matching rate and maximum co-contribution temporarily.

Indexation of co-contribution thresholds

Effective date: 1 July 2010

The Government has proposed the suspension of the indexation of co-contribution income thresholds for 2010-2011 and 2011-2012. In these years, eligible members will receive the full co-contribution if their Adjusted Taxable Income (ATI) is less than $31,920 and a partial co-contribution if their ATI is less than $61,920.

SG rate to increase

Effective date: 1 July 2013 onwards

The super guarantee rate will increase from 9% to 12% in increments of 0.25% in the first two years and 0.5% thereafter. This phased increase will start from 2013/14, as per the following table.

• This measure will provide a welcome boost to retirement savings for most working Australians.
• Superannuation fund members, especially those under age 50, will need to consider their contribution caps when making contributions to superannuation.

SG age limit to increase

Effective date: 1 July 2013

Currently, super guarantee (SG) contributions only need to be made on behalf of eligible employees up to age 70. From 1 July 2013, the SG age limit will increase to 75 to match the maximum age that applies to personal deductible and voluntary employer contributions (including salary sacrifice).

• This change is intended to provide an incentive for older Australians to stay in the workforce longer and boost their retirement savings.
• The new age limit will bring employer obligations in line with the age limit for voluntary and self-employed persons’ contributions.
• The work test for contributions by persons aged 65 and over has been retained.

Contributions tax refund

Effective date: 1 July 2012

From 1 July 2012, the Government will make a super contribution equivalent to 15% of the concessional contributions received by individuals on adjusted taxable incomes¹ (ATI) of up to $37,000, subject to a maximum amount of $500 (not indexed). It is anticipated that this will benefit 3.5 million individuals.

The first payment will be made in 2013/14 in respect of the prior financial year. A discussion paper will be issued as part of a consultation process to determine implementation arrangements.

The table below compares the net 9% SG contributions people with various ATI amounts will receive before and after this proposal.

Case study – Impact of contributions tax refund

Kate, aged 40, earns $35,000 pa, has a super balance of $25,000 and wants to retire in 20 years. By receiving a contributions tax refund of $472.50 pa [$35,000 x 9% SG x 15% contributions tax] Kate will be $22,120 better off at retirement in 20 years.

Assumptions: Kate’s salary doesn’t change over the 20 year period. She receives 9% SG throughout the period. The super investment earns a total pre-tax return of 8% pa (split 3.5% income and 4.5% growth) and investment income is franked at 30%. As Kate will be aged 60 at retirement, her super can be withdrawn tax-free.

¹Adjusted taxable income (ATI) includes assessable income, reportable fringe benefits and reportable employer super contributions.

Comments

• The Government will pay the contributions tax refund amount into the individual’s super account.

Concessional contribution cap increase

Effective date: 1 July 2012

The concessional contribution cap will remain at $50,000 for people aged 50 or over with total superannuation balances below $500,000. This cap was scheduled to reduce to $25,000 from 1 July 2012, following changes announced in the 2009 Federal Budget.

The measure may enable eligible fund members to utilise salary sacrifice and transition to retirement (TTR) pension strategies.

The Government will consult with the superannuation industry on the operation of the $500,000 threshold prior to implementation.

Comments:

• This will allow individuals with low superannuation balances to ‘catch up’ on their superannuation contributions as they are nearing retirement
• This proposal only applies to people with total super balances below $500,000.

²These thresholds are indexed in line with movements in Average Weekly Ordinary Time Earnings (AWOTE) in increments of $5,000 (rounded down).

Discretion on excess contributions tax

The Government has proposed changing legislation to allow the Commissioner of Taxation to exercise discretion, before a tax assessment is issued, for the purposes of disregarding or reallocating excess contributions.

Currently, if a contribution cap is exceeded, the member must wait until an excess contributions tax assessment notice is received before applying to have some or all of the contributions disregarded or reallocated to another financial year.

The Commissioner may choose to exercise this discretion where the excess contributions have arisen due to special circumstances (i.e. those that are unusual, exceptional, abnormal or uncommon and where applying the law would result in an unjust, unfair or otherwise inappropriate outcome).

Minor legislative changes

The Government will make a number of minor amendments to improve the operation of superannuation legislation, with intended effect from the 2010-2011 income year.

The amendments will include:

• permanently allowing claims for deductions of eligible contributions to be made to successor superannuation funds;
• increasing the time-limit for deductible employer contributions made for former employees; and
• clarifying the due date of the shortfall interest charge for the purposes of excess contributions tax.

Drought policy reform

Effective date: 1 July 2010

The Government will introduce new drought reform measures. Under the proposed measures, members may be eligible for the early release of their superannuation benefits.

Please note: No further details regarding this proposal have been provided in the Budget Paper.

Other announcements

Personal tax changes confirmed

Effective date: 1 July 2010

The previously announced changes to the personal income tax rates and thresholds have been confirmed. These changes are highlighted in bold below.

^{^} Does not include Medicare levy.

Interest income tax discount

Effective date: 1 July 2011

Individuals will be eligible for a 50% tax discount from 1 July 2011 on interest earned up to $1,000 on:

• deposits with authorised deposit taking institutions, bonds, debentures and annuity products; and
• the above investments where held indirectly via trusts or managed funds.

This discount will reduce the individual’s Adjusted Taxable Income (ATI), which may in turn increase their eligibility for payments and entitlements such as the Family Tax Benefit, Baby Bonus and the Commonwealth Seniors Health Card.

Standard deduction limits

Effective date: 1 July 2012

A standard personal tax deduction of $500 will apply to work-related expenses and the cost of managing tax affairs from 1 July 2012, increasing to $1,000 from 1 July 2013, without substantiation. Those taxpayers who wish to claim a greater deduction will still be able to claim their higher expenses in lieu of the standard deduction but will need to provide evidence of their claim.

Low income tax offset enhancement confirmed

Effective date: 1 July 2010

The Government has confirmed the increase in the maximum low income tax offset to $1,500 per year from 1 July 2010. As a result, the amount of tax-free income low-income earners can receive each year (and the upper limit to which a partial low income tax offset can be claimed) will increase to $16,000 and $67,500, respectively.

Tax-free incomes for older Australians

Effective date: 1 July 2010

Individuals aged 60 or over will still be able to receive an unlimited tax-free income from superannuation pensions. The table below shows the amount of taxable income that can be received tax-free by older Australians in other circumstances.

^* Does not include the Medicare Levy, but includes the low income tax offset and SATO, where applicable.
^# Assumes no income from other sources is received.

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Further Information

The information in this overview has been sourced from the Government’s Budget website: www.budget.gov.au

Important information

This material has been prepared by the Administrator and it contains information that is general in nature. The information does not take into account your objectives, financial situation or needs. Before acting on the information you should consider whether it is appropriate having regard to your personal circumstances and seek professional advice. The Administrator recommends that you consider the Fund’s Product Disclosure Statement (PDS) before you make any decisions about your superannuation. To obtain a copy of the Fund’s PDS, please contact a Plum Member Services Consultant on 1300 55 7586.

Neither the Administrator, the Trustee, nor any other company in the National Australia Group of companies accepts liability whatsoever for any decision that is made on the basis of or in reliance of the information contained in this material. Please note that the information contained in this material is current as at Monday, 10 May 2010. Any changes in the law or policy subsequent to this date have not been incorporated.