Budget 2015: What this means for clients
Catherine Chivers outlines what implications some of the 2015/16 Budget measures have for clients.
The 2015/16 Budget proposes a three-tiered approach to ensuring an equitable and sustainable future for all Australians.
This includes furthering jobs growth, providing an environment for small business to innovate and grow, and providing families with access to more effective childcare arrangements to enable increased workforce and learning participation.
In line with industry expectations, the Budget's revenue-raising measures did not extend to the superannuation sector, with no additional taxes being introduced on contributions, earnings or drawdowns from savings. This is welcome relief for retirees and savers alike.
Some of the key Budget measures of most relevance to clients are highlighted below.
TAXATION
MODIFICATIONS TO THE TAX TREATMENT OF EMPLOYEE SHARE SCHEMES
As previously announced, the Government has proposed reform of the taxation arrangements for Employee Share Schemes from 1 July 2015.
Under current law, income tax must be paid on options and shares when they vest, which is hampering the ability of relevant employers to suitably remunerate employees.
Key elements of this proposal are:
- Ensuring that the capital gains tax discount is applicable to relevant employee share scheme interests in circumstances where options are converted to shares, and these shares are disposed of within 12 months of the exercise date;
- Providing the Commissioner of Taxation with additional discretionary powers in relation to the minimum three-year required holding period; and
- Where options or shares are provided at a discount, having any necessary tax payable deferred until such interests are ultimately disposed of.
What this means:
- This measure will support individuals who have start-up enterprises, as it will facilitate entrepreneurship and innovation; and
- In addition, this measure will have relevance for employees who are keen to access equity in their employer as part of their remuneration arrangements.
TAXATION OF SMALL BUSINESSES
There were five key measures proposed with the aim of encouraging small businesses (companies with aggregated annual turnover less than $2 million) to be well positioned to grow and innovate.
These involve:
1) Immediate deductibility for key start-up expenses (such as legal and tax advice): Currently some of these expenses are deductible over a five-year term.
2) Accelerated depreciation: Where the asset purchased costs less than $20,000, then it will be able to be immediately deducted.
3) Tax cuts: Small businesses will be taxed at a new company tax rate of 28.5 per cent, with larger businesses (i.e. companies with aggregated annual turnover greater than the $2 million threshold) continuing to be taxed at 30 per cent. Importantly, the maximum franking credit rate will be maintained at 30 per cent irrespective of the company's size.
4) Capital gains tax rollover relief when restructuring: Presently small businesses may be prevented from restructuring in a way that best encourages longer term growth, due to the possibility of triggering a capital gains tax event. From 1 July 2016, small businesses will be able to alter their structure safe in the knowledge that there will be no capital gains tax liability incurred.
5) Fringe benefits tax changes for electronic devices: In this technological age, digital devices are a mainstay of all businesses. From 1 April 2016, small businesses that provide employees with more than one qualifying digital device will be afforded a fringe benefits tax exemption.
What this means:
- Individuals who presently own small businesses will typically observe immediate to medium-term cash-flow improvement, plus a more supportive base in order for these ventures to grow.
- Individuals considering investment in a small business venture will be assisted during the start-up phase in terms of enhanced cash-flow and capital gains tax relief when restructuring for growth.
INCREASE TO THE MEDICARE LEVY LOW-INCOME THRESHOLDS
The Government will increase the Medicare levy low-income thresholds for singles, families and single seniors and pensioners from the 2014/15 income year to take account of movements in the Consumer Price Index (CPI).
This will allow low-income taxpayers continual exemption from paying the Medicare levy, in circumstances where their income has not increased by greater than the CPI.
The threshold for singles will increase to $20,896. For couples with no children, the threshold will increase to $35,261 and the additional amount of threshold for each dependent child or student will increase to $3238.
For single seniors and pensioners, the threshold will increase to $33,044.
What this means:
Individuals of lesser income means will continue to receive the exemption from paying the Medicare levy.
TAX RESIDENCY RULES FOR TEMPORARY WORKERS
From 1 July 2016, most individuals who temporarily reside in Australia for working holidays will be treated as non-residents for tax purposes irrespective of their duration of stay and will no longer be able to access the tax-free threshold for Australian tax residents.
What this means:
- Individuals who temporarily reside in Australia for working holidays will be taxed at the higher foreign resident tax rates.
SUPERANNUATION
RELEASE OF SUPERANNUATION FOR TERMINAL MEDICAL CONDITION
At present, unrestricted tax-free access to an individual's superannuation interest can only occur when it has been certified by two medical practitioners (one of whom must be a specialist) that their likely life expectancy is within one year.
From 1 July 2015, it has been proposed that this period be widened to two years. This is a sensible and common-sense outcome, which has been overdue for change.
What this means:
- Individuals and their families in these difficult circumstances will be better able to plan their financial future with more certainty and also flexibility.
- This measure will hopefully provide some additional peace of mind, in terms of allowing relief from the financial burden of treatment costs.
AGED CARE
ALIGNMENT OF AGED CARE MEANS TESTING ARRANGEMENTS
Currently, where the accommodation cost for aged care is paid periodically, rental income received by aged care residents from their former home is exempt from the aged care means test.
The Government has proposed to remove the rental income exemption for individuals entering aged care from 1 January 2016.
In line with industry expectations, the Budget's revenue-raising measures did not extend to the superannuation sector, with no additional taxes being introduced on contributions, earnings or drawdowns from savings. This is welcome relief for retirees and savers alike.
The Government has affirmed their intention to retain the current annual and lifetime fee caps.
What this means:
- Individuals who plan to enter care from 1 January 2016 while retaining their home and renting it out may no longer benefit from choosing to pay their accommodation costs on a periodic basis.
- There will be no impact to individuals who are already receiving care prior to 1 January 2016.
HOME CARE PACKAGES
From 1 February 2017, eligible individuals will be able to directly receive a Commonwealth funded Home Care Package via the ‘My Aged Care Gateway', enabling them the flexibility to choose their service provider.
What this means:
- Individuals will have enhanced choice of any aged care services they require.
SOCIAL SECURITY AND OTHER FAMILY SUPPORT
CHANGES TO THE INCOME TEST
From 1 January 2016, the Government has proposed to limit the deductible amount of superannuation defined benefit income streams at 10 per cent for social security income test purposes.
Individuals in receipt of Veterans' Affairs pension and/or defined benefit income streams sourced from military superannuation funds are exempt from this measure.
What this means:
- This measure may impact the social security eligibility of individuals who are, or will be receiving defined benefit income streams. Review of any existing retirement planning arrangements and/or social security needs may be necessary.
CHANGES TO THE ASSETS TEST
From 1 January 2017, the Government proposes to increase the level of assets an individual may have in addition to their home, in order to qualify for a full pension (referred to as the ‘assets free area').
The Government also proposes to increase the tapering rate for the assets test from $1.50 to $3.00 per $1000 of assets held above the ‘assets free area'. This will effectively reduce the maximum value of assets that could be held to qualify for a part-pension.
Table 1 summarises the proposed changes to the ‘assets free area' and ‘upper thresholds'.
What this means:
- These measures will have mixed results. For some, the increase in the ‘assets free area' could result in an increased pension entitlement. For others, the change to the taper rate will result in a reduction of entitlements (and may even cause some individuals to lose their pension entitlements in their entirety).
- Individuals under age pension age who lose their pension entitlement as a result of these changes will automatically be issued with a Commonwealth Seniors Health Card or a Health Care Card. These cards provide similar discounts and concessions to the Pension Concession Card, including discounts on Pharmaceutical Benefits Scheme (PBS) prescription medicines.
- Individuals close to the relevant thresholds could consider strategies to reduce assessable assets in order to increase/retain their pension entitlements.
CHANGES TO CERTAIN CENTRELINK PAYMENTS WHILE ABSENT FROM AUSTRALIA
From 1 January 2017, the Government will reduce from 26 weeks to six weeks the period that certain recipients of the Age Pension, Wife Pension, Widow B Pension and the Disability Support Pension can receive their full basic means-tested rate while being temporarily out of Australia.
What this means:
- After six weeks' absence, pensioners who have lived in Australia for less than 35 years will be paid at a reduced rate. Individuals impacted will be those who are either presently away or who are planning extended holidays abroad. Similarly, these measures may also have relevance for those who anticipate spending longer periods residing overseas.
- Pensioners overseas as at 1 January 2017 will not be affected by this change unless they return to Australia and then subsequently depart. Importantly, other pensioners unaffected by these measures include those who have lived in Australia for 35 or more years, terminally ill/severely impaired Disability Support Pension recipients, plus certain Widow B Pension and Wife Pension recipients.
INDEXATION OF PENSION PAYMENTS
The Government will not proceed with the 2014/15 Federal Budget proposal to constrain increases to pension payments to the Consumer Price Index.
As a result, pension indexation will continue to be based on the higher of the increases in the Consumer Price Index, Male Total Average Weekly Earnings or the Pensioner and Beneficiary Living Cost Index.
What this means:
- It was anticipated that the Government's proposal to index pension payments only to the Consumer Price Index, would have resulted in lower indexation of pension payments received. Abandoning the proposal means this is no longer a concern.
DEEMING THRESHOLDS WILL NOT BE RESET
The Government will not proceed with the 2014/15 Federal Budget proposal to reset the deeming thresholds used in the pension income test to $30,000 for singles and $50,000 for couples from 20 September 2017.
What this means:
Resetting the deeming thresholds could have increased affected individuals' assessable income and potentially reduced their Social Security income support payments.
Abandoning the proposal means this is no longer a concern.
Catherine Chivers is the manager, strategic advice, at Perpetual.
AUTHOR
Industry Expert
Recommended for you
When entering paid employment, it’s not long before we are told that we’ll need to lodge a tax return but there are times when a person will be excepted.
Anna Mirzoyan examines how grandfathering affects income support payments and how factors such as paying for aged care can impact them.
There are specific requirements that only apply to trustees of self-managed superannuation funds, writes Tim Howard, including the allocation in their investment strategy.
Investments bonds offer a number of flexible, tax-advantaged benefits, writes Emma Sakellaris, but these are often overlooked as old fashioned when it comes to portfolio allocations.
