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» Articles - Australian Government Response To Henry Tax Review
Australian Government Response To Henry Tax Review
A Bear in Bull's Clothing... The Australian Government has released its response to the Henry review into taxation. Largely funded by a new Resource Super Profits Tax, the reforms include some key changes to superannuation and company taxation. This article provides a summary of these and other relevant announcements and how they may affect you.
Increasing the Super Guarantee (SG) rate to 12%
The SG rate will be increased gradually with initial increments of 0.25 percentage points on 1 July 2013 and 1 July 2014. Further increments of 0.5 percentage points will apply annually up to 2019-20, when the rate will be set at 12%.
Implications
Increasing the SG rate in the manner proposed will provide for higher super balances, particularly for younger individuals. For example, a 30 year old with a $30,000 current super balance earning a salary of $60,000 per year could see their super balance increase by $194,000 in nominal terms, or $69,000 in real terms. This assumes investment returns of 7.7% pa net of fees and inflation of 3% pa.
Raising super guarantee age limit to 75
From 1 July 2013, the age limit for payment of super guarantee contributions will be increased from 70 to 75. This will bring the SG age limit into line with that for personal and voluntary employer contributions.
Implications
The Government estimates 33,000 employees will benefit from this measure. The combination of an increased SG rate and longer availability mean that a person who will continue working until age 75 may see an increase in their retirement savings of $232,050 in today's dollars. This assumes investment returns of 7.7% pa net of fees and inflation of 3% pa.
Low income earners government contribution
The Government will provide a contribution equal to 15% of concessional contributions made, up to $3,333, for low income earners with an adjusted taxable income of up to $37,000. The maximum Government contribution paid will be $500 (not indexed).
This measure will apply to contributions made from 1 July 2012, with the first Government contributions expected in 2013-14.
This measure will apply to concessional contributions, including super guarantee contributions. It means that a person with an adjusted taxable income (ATI) of up to $37,000 will effectively not pay contributions tax on their SG contributions. The measure makes super contributions tax neutral for those on a 0% and a 15% marginal tax rate, as shown in Table 2. Note that from 1 July 2010, the 15% MTR will apply on incomes up to $37,000.
Low-income earning self-employed people will similarly benefit from the effective removal of contributions tax on deductible contributions. As shown in Table 3, clients in this situation will be able to maximise their net super contributions through a combination of personal deductible and co-contributions.
Assumptions: marginal tax rate of 31.5%, low income earners Government co-contribution applies to reduce effect of contributions tax to 0%, maximum pre-tax contribution $3,330, combination of personal deduction + NCC + co-contribution assumes maximum co-contribution for level of income, with remainder of pre-tax amount used for a personal deductible contribution.
Implications
Should this measure be implemented using similar mechanics as the existing Government co-contribution, eligible low income earners will need to ensure they lodge a tax return.
Higher concessional contributions caps retained for over-50's
From 1 July 2012 the higher $50,000 concessional contribution cap will be extended permanently for individuals aged 50 or over who have total superannuation balances of less than $500,000.
This measure will enable those with lower superannuation savings to make additional 'catch-up' contributions close to retirement, for example:
* Individuals who have not had the benefit of a full working life of superannuation.
* Those who take time out of the workforce as care-givers to young children, the elderly and those with a disability.
The Government will consult with the super industry on the operation of the $500,000 threshold. Note that superannuation funds currently report end of financial year account balances to the ATO through the member contribution statement.
Implications
Presumably 'superannuation balances' will include both accumulation and pension balances, so those implementing transition to retirement strategies at preservation age will need to take account of both balances in determining necessary salary sacrifice contributions. However, an increased concessional cap past 1 July 2012 should ensure continued use of this valuable strategy.
Company Taxation
The Government will reduce the company tax rate from its current level of 30% to 29% for the 2013-14 income year and to 28% from the 2014-15 income year. This measure, in part, has been introduced to offset the extra burden incurred on business from the increasing employer superannuation guarantee rate. Eligible small businesses will receive the tax cut one year earlier with a company tax rate of 28% from the 2012-13 income year.
This reduction will have little real impact on Australian resident shareholders due to the imputation system. However, this is a direct tax reduction for non-resident shareholders who are not eligible for imputation credits.
The Government will reduce the company tax rate from its current level of 30% to 29% for the 2013-14 income year and to 28% from the 2014-15 income year. This measure, in part, has been introduced to offset the extra burden incurred on business from the increasing employer superannuation guarantee rate. Eligible small businesses will receive the tax cut one year earlier with a company tax rate of 28% from the 2012-13 income year.
This reduction will have little real impact on Australian resident shareholders due to the imputation system. However, this is a direct tax reduction for non-resident shareholders who are not eligible for imputation credits.
Expanding capital allowances concessions for small businesses
This measure will commence from 1 July 2012 and will enhance and expand the existing capital allowance concessions available for small businesses by:
* Allowing small businesses to immediately write-off assets valued at under $5,000 (up from $1,000); and
* Allowing small businesses to write-off other assets, with the exception of buildings, in a single depreciation pool at a rate of 30%.
Resource Super Profits Tax
A key part of the Government's response to the Henry review is the proposed Resource Super Profits Tax (RSPT). While likely to have limited direct impact on financial planning activities and investment products, it is important to note that the Government's progress on other elements of its tax reform agenda will be dependent on the revenue derived from the RSPT.
A Resource Super Profits Tax (RSPT) will be introduced on 1 July 2012 at a rate of 40% on profits made from exploitation of non-renewable resources. It will replace the crude oil excise and operate in parallel with State and Territory royalty regimes, with the latter providing a refundable credit to the resource entity. The Government will consult extensively on the design of the RSPT.
Where to from here?
The Government has commented that tax reform is a long term process and that its plan is a significant first step in that process, representing a full reform agenda for several years. The proposed resource super profits tax is an important part of that process, as progress on the initial elements announced on 2 May 2010 will depend on securing revenue from its implementation.
The 2010 Federal Budget, to be handed down on Tuesday 11 May 2010, is likely to reiterate the Government's commitment to these proposals and provide details around funding and revenue implications.
For more information, or to discuss your specific situation, please contact me directly.
Robert Palma
Eden Wealth Management and Eden Tax Accounting
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