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Newsletter May 2006

The Federal Budget was handed down 9 May 2006 and announced personal income tax rates and higher income thresholds that will apply from 1 July 2006.  The effect of the tax cuts are set out in the following table.

The FBT rate will be reduced from 48.5% to 46.5% from 1 April 2006, to bring it in line with the new personal income tax rates that will apply from 1 July 2006.

With the change in tax rates from 1 July 2006, salary packaging with the exception of mobile phones, note book computers and other exempt FBT items will generally only be of an advantage to persons who have a taxable income in excess of $150,000.

If you are salary packaging a car or other benefits then it is worth while considering making an employee contribution for the gross taxable value of the benefit.  The reason being is that Fringe Benefits Tax rate is 46.5% where as the individuals tax rate from $25,000- $75,000 is 31.5% and for $75,000 - $150,000 is 41.5% (inclusive of the medicare levy).

With the top marginal tax rate of 45% applying for income above $150,000 then negative gearing will not be as attractive for lower income earners.   This is because negative gearing works by reducing the current cost with a tax refund.  If the refund is lower due to lower tax rates then the after tax cost increases.

From 1 July 2006, the low income tax offset will increase from $235 to $600.  The offset will begin to phase out from $25,000 (up from $21,600).

From 1 July 2006, single senior Australians who receive the senior Australians tax offset will be able to have taxable incomes up to $24,867 without paying tax (up from $21,968).  Couples who receive the offset will be able to earn $41,360 without paying tax (up from $36,494).

The Medicare levy low income thresholds will be increased with effect from 1 July 2005.  For individuals, the threshold will be $16,284 (up from $15,902) and, for families, the threshold will be $27,478 (up from $26,834).  The additional amount for each dependent child or student will be $2,523.  The threshold for pensioners below age pension age will also be increased from 1 July 2005 to $19,583.

The Government has released a plan outlining substantial changes and modifications to simplify the taxation of superannuation benefits.  The major proposed changes include;

• Removal of aged-based contributions limits - from 1 July 2007 the current aged-based limits will be removed and replaced with a fixed annual limit of $50,000 regardless of age.  Transitional measures will be enacted for persons over 50 years of age.  Employer contributions will be fully deductible.
• Superannuation benefits to be tax-free for 60-year-olds - Australians aged 60 and over who have already paid tax on their superannuation contributions and earnings will not pay tax on their superannuation benefits from 1 July 2007.
• Self-employed superannuation contributions to be fully deductible - self-employed taxpayers will now be able to claim a full deduction for pre-tax contributed amounts.
• Limit on post-tax contributions - to limit individuals from making large payments of post-tax income into superannuation, the government will restrict taxpayers to a maximum of $150,000 per year of post-tax contributions.  This measure will apply from 9 May 2006.

This plan was in fact a discussion paper.  The government has requested industry to make submissions to the government before August 2006.  Based on the submissions the new laws will be determined.  As in the past, there may be differences between the announcement made and the laws to apply from 1 July 2007.

The maximum undeducted contribution that can be put into superannuation from budget night (9 May 2006) is now limited to $150,000 per person per annum. There is talk that there may be an averaging over 3 years.  Our recommendation is that if you are near retirement and have surplus assets then you should consider transferring to a maximum of $150,000 per person per annum by way of undeducted contributions into the super fund.

A contribution can be made prior to 30 June 2006 and a further contribution can be made from1 July 2006.

All other changes will occur from 1 July 2007.