Tax News

Jan 25

Written by:
Wednesday, January 25, 2012 

What’s ahead in the new year on the tax front  -  will you be getting any benefit out of the recent tax changes that have been announced?

 Introduction:

Compared to recent years, the 2011 Federal Budget did not introduce any major changes, however, some new measures were outlined which will no doubt impact on how you manage your financial affairs and plan for your retirement.

In addition to the specific budget announcements, we now face the prospect of having to deal with the impact of the carbon tax which is expected to increase the cost to both individuals and businesses alike.  Cost increases will mean that you will need to factor these in any financial or business plan you put in place in the future.

In the following commentary we give you an update of the key changes that you will need to consider.

Personal tax changes

For the first time in nine years, there were no changes to the personal income tax rates and thresholds.  This means that you will not see and direct changes in the amount of tax you pay – but read further for a couple of nasty surprises.

The thresholds that apply for the 2011-12 tax year are shown in the table below:

Taxable income range	Tax payable in 2011-12 (excluding Medicare levy)
$0  -  $6,000	Nil
$6,001  -  $37,000	15% on amount over $6,000
$37,001  -  $80,000	$4,650 + 30% on amount over $37,000
$80,001  -  $180,000	$17,550 + 37% on amount over $80,000
$180,001 +	$54,550 + 45% on amount over $180,000

 

Surprise No 1

Removal of low income tax offset for under 18s [date of effect 1 July 2011]

Children under the age of 18 will no longer be able to access the low income tax offset (LITO) to reduce tax payable on unearned income such as dividends, interest and rent.  Typically, this type of income is usually received by way of distributions from family trusts.

This measure will not impact income earned by children from work, unearned income of orphaned or disabled children and compensation payments as well as inheritances received.

This measure will essentially eliminate the attractiveness of investing on behalf of minors or making trust distributions to minors.  Before the change minors were able to receive a maximum tax-free income of $3,333 where the LITO was taken into account.  However, from 1 July 2011, unearned income of minors is taxed as follows:

Unearned income	Tax payable in 2011-12 (excluding Medicare levy)
$0  -  $416	Nil
$417  -  $1,307	66% on amount over $416
$1,308 +	45% of the entire unearned amount

Surprise No 2

Flood levy

A temporary flood levy applies to both resident and non-resident individuals for the 2011-12 income year only.  The table below sets out how it applies.

Taxable income range	Tax payable in 2011-12 (excluding Medicare levy)
$0  -  $50,000	Nil
$50,001  -  $100,000	Half a cent for each $1 over $50,000
$100,000 and over	$250 plus 1 cent for each $1 over $100,000

 

Note:  Exemptions apply to certain individuals in receipt of an Australian Government Disaster Recovery Payment for a flood event or individuals who were affected by an event that occurred during 2010-11 and that was declared as a natural disaster under the Natural Disaster Relief and Recovery Arrangements.

Changes to distribution of low income tax offset (LITO)

From 1 July 2011 lower income earners will be taxed less during the course of the year, rather than being compensated after their tax return is filed.

This change will be implemented by increasing the proportion of the LITO delivered to lower income earners via their regular pay packets.  That is, there will be a reduction in the tax deducted from week to week which will result in no actual tax refund at tax time.  The measure will not alter the actual benefit entitlement.

This measure will not impact:

·         The maximum LITO available (currently $1,500);

·         The maximum amount of tax-free income lower income earners can receive each year (currently $16,000);  or

·         The upper limit to which a partial LITO can be claimed (currently $67,500).

Dependent spouse tax offset phase out

Effective from 1 July 2011, the dependent spouse tax offset will no longer be available for spouses born after 30 June 1971.  Certain exceptions will apply, including where a spouse is an invalid or permanently disabled.  The current offset is $2,243 per annum.

Reduction in GDP adjustment factor for Pay-as-you-go (PAYG) instalments

The GDP adjustment factor for PAYG instalment taxpayers who use the GDP adjustment method in 2011-12 will reduce from 8% to 4%.

The GDP adjustment factor for PAYG instalment taxpayers is used to determine the tax instalments to be paid in the income year by increasing the previous year’s adjusted taxable income by the previous year’s nominal GDP growth.  This method is commonly used by small businesses, individual investors and self managed super funds.  The reduction in the rate will have a beneficial effect on cash flows.

Small business tax relief

In order to qualify for these benefits a business must meet to small business tests, namely:

·         It must carry on a business, rather than invest in passive assets;  and

·         Satisfy the $2million aggregate turnover test.

Where the small business tests are satisfied, the business will be entitled to the following concessions:

1.       Immediate tax write-off of $5,000 of the cost base on purchase of a business motor vehicle, creating a tax benefit of $1,275.

2.       Increase of immediate value of write-off of assets purchased where the value of the asset is less than $5,000 (an increase from the previous value of $1,000).

3.       Reduction in company tax rates to 29% for the 2012-13 income year (for non-small business companies the reduction is to apply from the 2013-14 income year).

4.       The Entrepreneurs’ Tax Offset will be abolished with the introduction of the abovementioned changes from the 2012-13 income year.

Superannuation changes

Refund of excess concessional contributions

From 1 July 2011, persons meeting certain conditions can opt to have their excess concessional contributions taken out of their super fund and assessed as income at their marginal tax rate, rather than incurring the 46.5% excess contributions tax.

This measure applies to excess concessional contributions up to $10,000 (unindexed) and only for the first year in which an excess contribution occurs.

Higher pre-tax contribution cap for over 50s

People aged 50 and over with less than $500,000 in super will be entitled to contribute an extra $25,000 in pre-tax (concessional) contributions each year.  This measure ensures that the current increased threshold that applies for the over 50s will continue after 30 June 2012, but with the $500,000 limit applying.

Minimum pension draw down relief phased out

The minimum pension withdrawal you are required to make has been halved in recent years as a result of the Global Financial Crisis and the impact this has had on super balances.  This draw down relief is being phased out, reducing to 25% for the 2011-12 financial year and returnin gto normal from 1 July 2013, as per the following table:

Age at start of pension (and 1 July each year)	In 2010-11	In 2011-12	In 2012-13
Under 65	2%	3%	4%
65  -  74	2.5%	3.75%	5%
75  -  79	3%	4.5%	6%
80  -  84	3.5%	5.25%	7%
85  -  89	4.5%	6.75%	9%
90  -  94	5.5%	8.25%	11%
95 +	7%	10.5%	14%

 

Other tax changes

Single rate for car fringe benefits

From 10 May 2011 changes have been in place to the way cars are treated under the fringe benefits tax (FBT) rules.  These changes will reduce the motivation for employees to drive unnecessarily in order to increase their annual travel to receive more favourable tax treatment.

Previously, multiple statutory rates were used to determine the taxable value of car fringe benefits, which depended on distance travelled in a particular FBT year.  The new single statutory rate is now set at 20% which replaces the previous ones.  To maintain fairness, the measure applies to new contracts entered into after 7.30pm (AEST) on 10 May 2011 and is to be phased ion over four years, as follows:

Distance travelled	Previous rate	From 10 May 2011	From 1 April 2012	From 1 April 2013	From 1 April 2014
0 to 15,000 km	26%	20%	20%	20%	20%
15,000 to 25,000 km	20%	20%	20%	20%	20%
25,000 to 40,000 km	11%	14%	17%	20%	20%
>40,000km	7%	10%	13%	17%	20%

 

Note:  There will be an immediate benefit for employees entering into salary sacrificed motor vehicle arrangements where they travel less than 15,000 km per year, as they will gain the benefit of the new rate immediately.  Employees on existing contracts who travel more than 25,000 km per year will gradually lose their current advantage over the next 3 years.