LJ Financial's 2013/14 Federal Budget Review

This week Labour’s treasurer Wayne Swan announced a number of intended changes to tax, superannuation and entitlements. LJ Financial have reviewed these possible legislative changes and the implication to Australians if these laws are passed.

Taxation Reform
There were no major changes to the marginal tax rates, compared to most recent budgets, with the only intended amendments being the increase of the lowest taxable income threshold increase from $18,200 to the new value of $19,400 in 2015/16 and the increase of a marginal tax rate from 32.5% to 33%. In addition to this, the low income tax offset entitlement is intended to be reduced from $445 to the value of $300. However the major reform that the Labour Government is looking to pass that will affect nearly all tax paying individuals is the increase to the Medicare Levy of 2% to fund the Disability Care Australia scheme. This increase of 0.5% will also be added to the tax penalty for those who exceed the contributions cap to superannuation.

Superannuation
This area, will see a greater amount of reform and in turn implications for Australians. Firstly the tax exemptions for those earning more than $100,000 as an income stream from their superannuation. From 1 July  2014 the government, if the reforms are passed, will tax retirees with earnings greater than $100,000 p.a a flat rate of 15%. Assuming an earning rate of 5%, this will likely affect those individuals with balances great than $2,000,000 in superannuation, representing around 16,000 individuals in Australia or 0.4% of projected retirees in that year.

Another change to the superannuation scheme is the tiered increase in the concessional contributions cap. As of today’s date, all Australians regardless of age cannot contribute more than $25,000 pre-tax dollars per annum without receiving heavy tax penalties on their contributed funds.  The Government has proposed in the budget to increase this cap to $35,000 for individuals 60 years and over from 1 July 2013. From the 1st of July 2014 this increase will apply to those aged 50 years and over and the Government has indicated that by 1 July 2018 all Australians contributing to superannuation will be able to contribute $35,000 pre-tax dollars to their respective superannuation accounts. In addition, the Government has reduced the excess concessional contributions tax from the highest marginal tax rate (46.5%) to the individual’s marginal tax rate as well as allowing individuals to withdraw any excess concessional contributions from superannuation post July 1st 2013.  The penalty for accidentally exceeding the limits will not be so onerous as currently applies.
The final major change is for those on salaries in excess of $300,000 p.a. These individuals will now be taxed at a rate of 30% rather than the 15% rate that currently applies for pre-tax contributions made to superannuation.

Social Security
As of 2014 the Government is offering an exemption on the means test for aged pensioners who are downsizing their family homes. However to qualify for the exemption the pensioner must have lived in the house for at least 25 years and 80% of the proceeds must be deposited into a special account (the details of which have not yet been defined).
As of 1 March 2014 the lower income test threshold is to increase to $100 per fortnight for Newstart Allowance, Parenting Payment, Widow Allowance, Sickness Allowances and Partner Allowance. The $100 threshold will be indexed annually to CPI from 1st July 2015.
Finally, the Family Tax Benefit A increase is to be deferred. This is in conflict with the previous announcements meaning that the increase from $300 to $600 p.a. for families with 2 more or more children has been deferred indefinitely.

What this means for you
Overall LJ Financial views this as a relatively positive outcome with no major changes to the indicators that were given prior to the Budget announcement. One major positive is for those individuals contributing to their superannuation. The intended increase in concessional contributions means that Australians can gain more out of their superannuation and that the government is willing to have less involvement in the scheme and in turn allow accumulators to increase their potential for tax savings. Obviously the change in policy felt by nearly all Australians is the Medicare Levy increase of 0.5%, however tax payers can be comforted by the fact that the subsequent revenue is dedicated to improving the welfare of Australians in need of disability care, an area in much need of reform.

Regardless of whether none, some or all of these reforms become law it is important to assess your own “budget” coming into the new financial year. Investigating and setting financial goals and what you want to achieve, particularly from a tax and superannuation perspective is important and should be encouraged.
Also talking to a financial adviser who can assist you in deciphering these and any other changes to the superannuation, tax and entitlements scheme by the government as well as providing you with strategies based around these potential changes may help you achieve both your financial and lifestyle goals.
Finally ensure that you review the response from the opposition party in Canberra as this is an election year and any major changes or differences in relation to the Budget is the best indication of what their first budget may look like next year if they were to assume power.




Duncan Brown