Changes affecting small businesses and individual taxpayers
Taxation of superannuation
Currently all earnings from assets supporting superannuation pensions are tax-free, however from July 1, 2014, individual superannuation member accounts which are in pension phase that have more than $100,000 annual earnings will be taxed at 15% on their earnings above that amount. The change applies only to earnings and does not apply to pension payments. It is anticipated that the $100,000 threshold will be applied to multiple pension accounts that each member has across all super funds, although it is not clear how this would be administered.
The Government estimates that this measure will only affect superannuation members who have superannuation balances of $2 million and over (i.e. $2,000,000 divided by 5% = $100,000).
Transitional provisions will apply to capital gains derived on assets purchased before 1 July 2014 as follows:
- Assets purchased before 5 April 2013 – Only the capital gains that accrue after 1 July 2024 will be counted as income;
- Assets purchased between 5 April 2013 and 30 June 2014 – The fund member can choose to include as income the lower of the capital gain calculated from the date of purchase or the gain that accrues from 1 July 2014; and
- Assets purchased from 1 July 2014. The entire capital gain is included as income.
Pension deeming rules, used by Centrelink, which deem minimum rates of interest wiil be applied to superannuation account-based income streams. All products held by pensioners before January 1, 2015 will be grandfathered indefinitely and continue to be assessed under the existing rules for the life of the product “unless they choose to change products”.
From 1 July 20-14, deferred lifetime annuities will receive the same concessional tax treatment that superannuation assets supporting income streams receive.
Concessional contribution caps
Concessional contribution caps for people aged over 60 will increase from $25,000 to $35,000 from July 1, 2013. The higher limit will also be made available to those aged 50 and over from July 1, 2014, and all other super contributors from July 1, 2018. The government had previously said it would increase the cap to $50,000 – which is no longer on the table.
Excess concessional contributions will be taxed at an individual’s marginal rate, plus an interest charge.
Increase in Superannuation Guarantee (SG) Rate To 9.25%
From 1 July 2013 the superannuation guarantee (SG) rate will increase from 9% to 9.25% and will increase incrementally each year as follows until the year ended 30 June 2020 as follows:
|1 July 2013||9.25%|
|1 July 2014||9.50%|
|1 July 2015||10.00%|
|1 July 2016||10.50%|
|1 July 2017||11.00%|
|1 July 2018||11.50%|
|1 July 2019 and onwards||12.00%|
Superannuation Guarantee (SG) Contributions To Continue From Age 70+
From 1 July 2013 superannuation contributions must be paid for all eligible employees – irrespective of their age and the only age-based exception which will continue from 1 July 2013 is that SG contributions do not need to be made for an employee under the age of 18 and working for no more than 30 hours per week.
Increase in ASIC fees
The government has revealed an increase in the cost of registering a business name, with the Australian Securities and Investments Commission (ASIC) increasing fees to $32 for one year and $74 for three years. Some of the revenue from the move will be used by the corporate regulator to upgrade its call centre infrastructure to better cope with increasing demand from small business.
Net medical expenses tax offset to be phased out
The Net Medical Expenses Tax Offset (NMETO) will be phased out with transitional arrangements for those currently claiming the offset. The NMETO will continue to be available for taxpayers for out-of-pocket medical expenses relating to disability aids, attendant care or aged care expenses until July 1, 2019 when DisabilityCare Australia is fully operational and aged care reforms have been in place for several years.
From 1 July 2013, taxpayers who claimed the NMETO offset in 2012-13 will be eligible for 2013-14 if they have eligible out-of-pocket medical expenses above the $2,120 or $5,000 expense threshold, depending on income. Taxpayers who claim the offset in 2013-14 will be eligible to claim the offset in 2014-15.
Out-of-pocket medical expenses relating to disability aids, attendant care or aged care will continue until 1 July 2019.
Medicare levy low-income threshold
The government will increase the Medicare levy low-income threshold to $20,542 for individuals, $32,279 for pensioners eligible for the Seniors and Pensioners Tax Offset, and $33,693 for families, with the additional family threshold amount for each dependent child or student increasing to $3,094. This measure is estimated to have a cost to revenue of $38 million over the forward estimates period. The additional amount of threshold for each dependent child or student will also increase to $3,094. These measures apply from July 1, 2012.
Changes to work-related self-education expenses
The government will clamp down on work-related self-education expense deductions through an annual $2,000 cap on these expenses from July 1, 2014. Deductible education expenses are costs incurred in undertaking a course of study or other education activity, such as conferences and workshops, and include tuition fees, registration fees, student amenity fees, textbooks, professional and trade journals, travel and accommodation expenses, computer expenses and stationery, where these expenses are incurred in the production of the taxpayer’s current assessable income.
Employers are generally not liable for fringe benefits tax for education and training they provide or fund for their employees, in order to support employers investing in the skills of their workers. This treatment will be retained, unless an employee salary sacrifices to obtain these benefits.
HECS-HELP discount and voluntary HELP repayment bonus discounts to end
From January 1, 2014, the following discounts relating to the Higher Education Loan Program will be removed:
- the 10% discount available to students electing to pay their student contribution up-front, and
- the 5% bonus on voluntary payments made to the ATO of $500 or more
Increase in the Medicare Levy to fund DisabilityCare Australia
From July 1, 2014, the Medicare levy will increase by 0.5 %.The funds raised will be spent on DisabilityCare Australia to provide certainty to Australians with a disability, their families and their carers.
Low-income earners will continue to receive relief from the Medicare levy through the low-income thresholds for singles, families, seniors and pensioners. The current exemptions from the Medicare levy will also remain in place.
Capital gains tax (CGT) and foreign residents
The principal asset test for foreign resident CGT will be amended and a non-final withholding tax will be introduced. This will ensure that indirect Australian real interests are taxable if disposed of by a foreign resident.
Effective from 1 July 2016, when a foreign resident disposes of certain taxable Australian property, the purchaser will be required to withhold and remit to the ATO 10% of the proceeds of the sale as a non-final withholding tax. This will not apply to residential property transactions under $2.5 million or disposals by Australian residents.
Many people would be surprised that there is now over $ 1 trillion invested in superannuation ! So just who manages all this money ?
A recent review of the superannuation industry by the Cooper Superannuation Review has just released comprehensive statistics about the superannuation industry and notes that the largest group managing these funds is held by Australia’s Self-Managed Superannuation Funds (SMSFs). SMSFs accounted for 30.9% of all superannuation assets ($332 billion out of $1 trillion). SMSFs have been the fastest growing segment of the superannuation industry, at 20% per annum over the five years to June 30, 2009 compared with the overall industry growth rate of 8% per annum.
These statistics released disprove claims that SMSFs are generally high-cost operations. The SMSF sector has reduced its average fees from 0.86% of assets in 2006 to 0.69% of assets in 2008. This figure is well below the superannuation sector as a whole, with an estimated cost of 1.2% per annum in 2008.
The lower administration fees indicates that the SMSF sector is competitive and has been able to attract larger account balances, without extensive promotion. SMSFs are popular with small businesses owners and offer potential cost savings, allowing up to four members in the one fund, thus aggregating the funds available for direct investment.
The operating costs of a SMSF are relatively fixed and include accounting, government fees and audit fees.
SMSFs have also performed well on the investment side. The Australian Taxation Office estimates of SMSFs produced returns of 12.6%, 16.9% and -6.1% in the years ended 2006, 2007 and 2008 respectively. These returns are better than the APRA regulated fund returns of 12.2%, 13.3% and -7.8% over the same period. SMSFs have clearly provided competitive returns over recent years. Less than 1% of SMSF assets are in overseas investments. This has possibly helped the performance of this sector in recent times.
The advantages that SMSFs offer means the growth is likely to continue – subject to whatever changes the Cooper review into super may recommend – but it is a complex area and you need to think through the long-term impacts.
New superannuation funds are being established at the rate of 2500 per month.
Seeking specialist advice and taking the time to understand things like trustee responsibilities before climbing aboard the SMSF bandwagon may be the best investment you make.
Read about our superannuation fund service here.
Contact us for further assistance.
It might at first sound like a daunting task to start and administer your own superannuation fund. Thousands of new funds are established each year. The benefits of operating your own fund include:
- You have the capacity to exercise direct control over the performance of your superannuation investment. Questions are often raised about the poor recent performance of some pooled or managed superannuation policies, and this has led many to the belief that they could do the investment management role as well as the professional fund managers. This is a debate that I won’t weight into.
- A flexible investment approach. The nature and extent of superannuation investments is controlled by the Superannuation (Supervision) Act, however despite these controls, there is ample scope for a very wide selection of investments, including property related investments.
- Possible administration savings. Where significant superannuation investments are available for investment, there can be cost savings in administering your own fund rather than paying a fixed percentage of the amount invested to a professional fund manager. Discuss this further with your accountant or solicitor.
- Tax deductible term life assurance cover. Term life assurance premiums are not tax deductible when paid directly by the policyholder. However, these premiums are tax deductible when paid by a complying superannuation fund. Discuss this matter further with your accountant.
Procedures involved in establishing your own Superannuation Fund
For clients wishing to establish their own superannuation fund, clients would be advised to seek professional assistance from their accountant or solicitor. Each superannuation fund requires a trust deed to be prepared and executed. In some states stamp duty is payable on the executed deed.
Decisions need to be made at the outset who will be the trustee of the superannuation fund. The trustee could be individual/s or a company.
Each excluded superannuation fund is required to establish an investment strategy. This document sets out the goals which the fund intends to achieve, and takes into account matters such as the risk profile of members, the ages of the members, cashflow requirements of the fund, and diversification of investments to minimise investment risk. The investment strategy should be monitored and reviewed periodically to ensure it remains relevant to the needs of members.
Read about our superannuation fund service here.
Contact us for further assistance.