Federal Budget 2007
The 8 May Federal Budget contained a number of proposals which when passed will impact the financial planning industry.
Highlights
1. Personal income tax cuts
2. Earlier payment of child care benefits
3. One-off superannuation co-contribution boost
4. Social Security
Taxation
Personal income tax cuts phased in over 2 years
From 1 July 2007, the 30 per cent threshold will increase from $25,001 to $30,001. In addition, from 1 July 2008 the 40 per cent threshold will increase from $75,001 to $80,001 and the 45 per cent threshold will increase from $150,001 to $180,001.
New personal tax rates
Low income earner tax offset (LITO)
From 1 July 2007, the LITO will increase from $600 to $750 and will begin to phase out from $30,000, up from $25,000. Individuals will not pay tax until their annual income exceeds $11,000 (up from $10,000). A minor could earn $1,667 annually and not pay any tax.
Senior Australian Tax Offset (SATO)
Senior Australians eligible for the SATO and the LITO currently do not pay tax until they reach an annual income of $24,867 for singles and $41,360 for couples (depending on the income received by each member of the couple). The tax cuts lift these income levels as per the table below.
Tips / Strategy
Retirees deriving retirement income from non-superannuation sources such as shares, managed
funds, property and ordinary annuities who are eligible for the Senior Australians Tax Offset (SATO) will be able to earn $25,867 pa if they are single, and $43,360 pa combined if they are a member of a couple before paying income tax.
Medicare Levy
The thresholds from 1 July 2006 will be as follows:
The Medicare Levy threshold for senior Australians will also be increased to ensure that they do not pay Medicare Levy until they begin to incur an income tax liability.
Dependent spouse offset
The Government will increase the dependent spouse offset from $1,655 to $2,100 with effect from 1 July 2007.
This measure will increase the separate net income at which the rebate is completely phased-out from $6,901 to $8,681.
Child Care Benefit (CCB) & Child Care Tax Rebate (CCTR)
From 1 July 2007, the rates of CCB (currently $2.96 per hour) will be increased by 10 per cent on top of annual indexation.
From 1 July 2007, families will be able to receive their CCTR - up to a maximum of $4,000 (indexed) per child - as a direct payment through Centrelink shortly after the financial year in which they incur child care costs. This represents a bring-forward in the timing of the CCTR on current arrangements.
Families who incur out-of-pocket child care costs in both 2005-06 and 2006-07 will receive two rebates in 2007-08. They will receive one rebate for 2005-06 expenses as part of their tax assessment under existing arrangements, and the other, for 2006-07 expenses, as a direct payment. As part of the new arrangements, lower income families who previously had insufficient income to receive their full rebate entitlement will now be able to benefit fully from the CCTR.
Superannuation
Co-contributions
The Government will make a one-off additional co-contribution into the superannuation accounts of those persons who made personal after-tax contributions in the 2005-06 income year.
The measure will double the co-contribution paid in respect of personal after-tax contributions that were made in the 2005-06 year. For example, if a person was eligible for a co-contribution of
$1,500 in respect of the 2005-06 year they will now receive an extra co-contribution of $1,500, so
that the total co-contribution in respect of that year would be $3,000. If they were eligible for a $500co-contribution they will receive an extra $500 giving them a total co-contribution of $1,000 for the year.
The measure has no application to personal after-tax contributions made in the 2006-07 income
year.
Capital gains tax — extending small superannuation fund roll-over on marriage breakdown
From 1 July 2007, the Government will allow one spouse in a marriage breakdown to transfer their entire in specie interest in a small superannuation fund to another complying superannuation fund that is able to accept in specie roll-overs, without there being an immediate capital gains tax (CGT) taxing event.
Currently, the CGT roll-over for assets of small superannuation funds on marriage breakdown
applies only to the spouse who benefits from a payment split made under the Family Law Act 1975 and only to the assets subject to the payment split. Currently, these assets can be rolled over only to another small superannuation fund.
Choice of Fund — public offer funds prevented from imposing a participating employer
requirement
From 1 July 2007, the Government will prevent public offer funds from requiring that new
employers sign ‘participating employer’ agreements before accepting contributions on behalf of
fund members.
Currently, funds may require employers to become a ‘participating employer’ in order to make
contributions to an employee’s existing fund.
To assist the Choice of Fund provisions this measure will generally allow employees to choose to
remain in a fund following a change of employer, rather than having contributions paid to another
fund.
Social Security
Pension Bonus Scheme — enhancements
From 1 January 2008, there will be a number of enhancements to the Pension Bonus Scheme
(PBS):
• The surviving partner of a deceased member of the PBS will be able to receive the bonus
that their deceased partner had accrued, but had not claimed, before their death;
• PBS members who take recreation leave, long service leave or unpaid leave, will be
allowed to continue in the scheme as non-accruing members for up to 26 weeks without
failing the scheme's work test;
• A 'top up' will be made to bonuses where the rate of pension a person receives increases in
the 13 weeks after it was granted, because the person's assessed income and / or assets
decrease in that time; and
§ The discretion Centrelink and Department of Veterans' Affairs decision makers already
have will be broadened to extend the period in which people must claim their bonus after
failing the PBS work-test.
Funeral bonds means test exemption — increased threshold
The existing social security income and asset test exemption threshold for funeral bonds will
increase from $5,000 to $10,000 per person or couple.
This will apply to both existing and new funeral bonds taken out from 1 January 2008.
Aged care — simplified income-tested care fees
Currently, self-funded retirees pay higher income-tested fees because nearly all of their income is
counted under the income test. However, pension income is currently not counted under this test.
A new simplified income test will apply to new and existing residents from 20 March 2008. It will
include both pension and private income in assessable income. Fees for existing residents will not be increased as a result of this measure, but they may be reduced.
Bonus & Career Allowances
A one-off non-taxable bonus payment of $500 will be paid to each person who currently qualifies
for either the Utilities Allowance or Seniors Concessions Allowance.
Recipients of the Carer Payment will receive a $1,000 bonus payment while those who receive the Carer Allowance will be given a $600 bonus payment.
Additionally, the $1,000 bonus will be paid to those who receive both the Carer Allowance and
either the Wife Pension or the Veterans' Affairs Partner Service Pension.
The bonuses will be paid by 30 June 2007, be tax free and not treated as income when calculating social security payments.
Source: Tapin Flash