2013 Federal Budget
If there is something in last night's budget you are not real thrilled about, it is a bit hard to worry when so much of the Budget announcements of 12 months ago are not yet law. With an election in less than 4 months from now and that Parliament being prorogued about a month before that, the probable 'mini budget' following the election is likely to be more chance of having any impact on your finances.
If you are interested in the Budget you would have read the newspapers by now, so let's focus on some points of interest and tie a few things together, that you may wish to consider in your current planning and decision-making.
Large Medical Expenses
The Government has already changed the entitlement to the 'medical expenses tax offset' depending upon your income, by changing the threshold and changing the offset calculation (20% v 10%, depending upon your level of income), now they are introducing a bizarre level of complexity that has no sense or equity at all.
If you have significant medical expenses in the 2014 tax year (starting July 2013) and meet other qualifying criteria allowing you to claim the net medical expenses tax offset, you will only get the tax offset if a claim was included in your 2013 tax return.
So if you and your 'neighbour' have identical circumstances, but they did not have an offset claim in the 2013 tax return, you can claim and they can't.
There are similar knock-out consequences for 2015.
There seems to be no reason or logic for this, and simply increases the level of complexity with no increase in the equity of the tax system.
There were significant changes announced a few weeks ago regarding superannuation that will affect the long term retirement planning of most people, and should at least be considered by everyone:
a winding back of CGT concessions to superannuation funds;
a limit to tax concessions on high income from a superannuation fund (previously entirely tax free in most instances);
limitations on making contributions to your superannuation fund ahead of retirement.
We recently assisted one client aged 68 years, who had just received a $400,000 inheritance following his mother passing away.
He was already retired and living on a modest superannuation balance. He wanted to contribute the inheritance amount to his superannuation fund.
For most people of working age, there is no problem. Although 'non concessional contributions' are generally capped at $150,000 in a tax year, an individual can 'bring forward' the next two years' contribution entitlement and contribute up to $450,000.
Unless you are aged 65 years or more, where the bring-forward rule is not permitted.
So a 60 year old, or a 20 year old, can put $450,000 into superannuation.
But not a 68 year old having just received an inheritance.
This is dumb public, social and retirement policy, and nothing in last night's budget to correct this inequity.
Baby Bonus - You Have 9 Months and 2 Weeks
There is a lot in the media about this today so we will simply point out that if you intend to claim the full benefit of the current baby bonus, you need to qualify within around 9 months and 2 weeks.
Student Debts (HECS / HELP)
The Government is persisting with the removal of the voluntary repayment bonus scheduled for 1 January 2014 so if you have a debt and have the capacity and will to eliminate the debt, we encourage you to consider utilising the benefit of the bonus before the chance runs out.
The 2012 tax year was the last for the 'entrepreneurs tax offset' so if you were hoping for a similar tax break in 2013 and following years - it is gone.
12 months ago the Government announced that they were going to remove access to the benefit of the general 50% CGT discount to individual non-resident taxpayers.
Not only is this not yet law, but only 2 months ago did the Government release the draft legislation and supporting materials, so it is hard to see that this will be law anytime in the next 6 months.
Please refer to comments above regarding the election.
Last night another 'amazing' proposal was put forward, which sounds incredibly complex the more you think about it, is that residential homes over $2.5m and other property sold by non-residents is going to be subject to a non-final withholding tax, to be withheld by the purchaser of the property.
How this could be administered is truly intriguing.
But 'don't worry', you will only need to worry about this if the disposal is likely to give rise to gain on revenue account (no idea how a Purchaser would know, or care about, that).
The Budget assures us that more information will be available toward the end of 2013, so this gem should be available for Christmas reading by tax geeks like me.
And remember that the old 29% tax rate is slated to be 32.5% for the current 2013 and following 2014 and 2015 tax years, to then increase again to 33%.
Higher rates apply where reportable, Australian source income exceeds $80,000 but we are fairly sure we have no clients in such a situation (just contact us for more details if you are not sure).
But at least non-residents won't be exposed to Medicare levies so won't contribute to the higher levy for the NDIS (which the Medicare levy will only succeed in funding a small part of).
Compliance, Swiss Bank Accounts etc
The Government is providing more funding to the Australian Taxation Office, AUSTRAC etc to assist 'catching' people trying to cheat the system.
Whilst this sounds encouraging and creditable, our office is finding that this is only increasingly compliance costs for clients who do the right thing.
I certainly hope they are catching the 'bad people' and collecting more revenue than the cost of their audit and compliance activity, because we have had some dreadful examples from the ATO recently.
The simplest way to explain this, is the ATO is using more sophisticated, intelligent information and software to data-mine poor data that is generating costly, useless queries being generated.
one client was 'caught' by the ATO under-reporting their income from an employee share plan, but the data the ATO had included 'foreign' income they had earned whilst non-resident and was not subject to Australian tax;
another client was 'caught' under-reporting interest income from a term deposit - simply, the ATO data included the total interest income expected from the term deposit, not just the interest earned up to the date that the account was closed early;
another client was 'caught' and accused of being a tax resident of Australia, for not reporting his foreign income despite the taxpayer clearly being a non-resident and not subject to Australian tax. That he had transferred his own personal money, taxed overseas, to an Australian bank account was picked up by AUSTRAC and the ATO believed it was income;
yet another client was 'caught' not reporting over $200,000 income in his tax return back in 2009 (the ATO takes a while to chase up sometimes). We investigated the tax return prepared by another 'registered' tax agent and found that yes, the income was omitted but it was 'exempt' income. Though it was exempt, the previous tax agent failed to report it as 'exempt foreign employment income' which is still important as it can affect the calculation of tax on other income. So we amended the tax return prepared by the other agent for our client, and the ATO issued a bill for just under $26.
Sometimes, even the 'experts' get it wrong, so it is crucial that your taxation affairs are taken care of by a competent professional who is ready to strongly defend your interests in the event of matters being challenged by the ATO, who is experienced and knowledgeable with your circumstances.
(And for the record, our office frequently responds to new clients with affairs that we are not experienced with to seek the services of another professional - we do not take on all clients, including where they can interfere with our care and time for our existing clients.)
Want to escape this all and head out of Australia riding your big Swiss bank account balance? Don't worry, the ATO will be watching (what ATO officer wouldn't want a reason to head over to the Swiss Alps on a working holiday?).
Tax Planning Opportunities / Need Increasing
I know this is going to hurt some to remind, but some accountants have long memories.
Back in 2000 when the GST was introduced, the expected lift in prices was 'justified' by a compensation package which included fairly generous individual tax cuts that meant that about 80% of taxpayers would not be on a marginal tax rate of more than 30% (plus Medicare).
$80,000 today is worth a lot less than it was worth 13 years ago (roughly $54000 in 'real' dollars) and that is the level at which the Individual / Personal marginal tax rate now jumps from 30% to 37%.
changes to family benefits;
winding-back of access to tax offset on private health insurance and medical expenses;
reducing availability of real tax deductions such as for self-education and deductible (concessional) superannuation contributions and higher rates applicable to (very) high income earners;
winding back of FBT concessions;
increased Medicare Levy;
winding back of the dependent spouse tax offset (depending upon the age of your spouse!);
limiting tax deductions on investments such as protected loans, etc,
managing the family budget and saving and investing over your lifecycle is becoming increasingly difficult.
It has long been our policy of not 'marketing' to clients advice and services that you do not ask for - but we help any client as much as we can when you do ask for help or counsel, with absolutely no vested interest and with your best interests at the centre of any advice or service we provide to you.
Negative gearing into property and other tax structuring is going to become more attractive, which had largely fallen out of favour since the GST was introduced and especially when the top marginal tax rate first moved to incomes above $180,000 - it was a lot less attractive to negative gear investments when the top marginal tax rate kicked-in from $180,000 compared to just $50,000, which was the case (would you believe) just before the Sydney Olympics in 2000.
So if you are likely to generate high non-employment income, whether it is from leasing low-capital return commercial properties, share or option trading or even profitable horse syndications, enjoying the benefit of a 30% tax rate through a company and / or tax structure could be highly beneficial to long term investment planning and wealth creation, depending upon your circumstances.
If you have any questions at any time, make sure you to check with us to ensure you do not lock yourself into higher taxes or a crippling structure you don't need.
Reminder: Private Health Insurance Premiums
Sadly this is going to affect a lot of people who already (from July 2012) will not be entitled to the Private Health Insurance Tax Offset that most people enjoy the benefit of, by paying lower health insurance premiums.
The tax offset available to a single person will start to reduce once income exceeds $84000. Once it exceeds $130000, there will be no tax offset benefit at all.
A couple or family will start to lose the tax offset once your combined income exceeds $168,000 and will completely disappear where your combined income exceeds $260000.
If the above changes affect you, and you are still paying only 70% of your premiums, you will be hit when you lodge your 2013 income tax return.
So look out - and start budgeting for this now.
High income earners who do not have the requisite private hospital cover may find they are exposed to Medicare Levy Surcharge of up to 1.5%, in addition to the standard 1.5% Medicare Levy. That is a total of 3% in medicare levies (and 3.5% once the higher Medicare Levy starts, as previously announced, on 1 July 2013).
Remember, if you and your dependents are not covered by the requisite level of private health insurance, you may all be subject to the Medicare Levy Surcharge.
We have found this has surprised some including:
a couple who had full 'family' cover but after the birth of a child, the Fund failed to 'name' the child on the policy. From that date, the couple were technically exposed to the surcharge from the date of birth of the new dependent that was not named on the policy (even though the policy paid out for the pregnancy, birth, etc);
a gay couple, who are now spouses for tax purposes and not treated for tax purposes as two 'single' people where one had a high income and the other had very little income, were both exposed to the surcharge as the lower income earner did not have cover - so on very little income, the low-income partner was exposed to surcharge and the high-income earner, despite having insurance, also had to pay surcharge;
a taxpayer who was on a temporary visa and had travel-style medical insurance that was not compliant for avoiding Medicare Levy Surcharge and who was granted permanent residency, was subject to the surcharge.
So when-ever there is a change in your circumstances, family members, spouse, visa status, etc - remember that you may need to update your private health insurance otherwise you may be exposed to the surcharge.