Many of the major budget decisions were pre released by the government, nevertheless, there were still some important announcements in last night’s budget.
In this report, Aon Hewitt focuses on the key issues that may affect you. We cover the budget announcements relevant to employers, financial advisers and superannuation fund members including changes affecting superannuation, the labour force and the tax regime.
Budget decisions: The tax on pre-tax (concessional) contributions to superannuation will be doubled from 15% to 30% for people earning $300,000 a year or more. The definition of income for this measure will include taxable income, concessional superannuation contributions, adjusted fringe benefits, total net investment losses, target foreign income, tax-free pensions and benefits, less child support.
If an individual does not exceed the threshold except for their concessional superannuation contributions the higher rate will only apply to the part of the concessional contribution that is above the $300,000 threshold. For those few employees who are in a defined benefit plan the employer’s notional contribution is categorised as a concessional contribution.
What this means:
Employers - Employers are not expected to be responsible for implementing this tax although the details are to be finalised. It is likely that superannuation funds and the ATO will calculate and apply the tax.
Employers may wish to consider their remuneration practices for affected employees.
Individuals - If an individual’s income is less than $300,000 there is no change to their concessional contribution tax rate and pre-tax contributions are still a tax-effective way to save for retirement. If their income is over $300,000, contributions to superannuation will still be tax effective as they will be taxed at a lower rate than the higher marginal rate. However, they might still want to seek advice on their optimal tax strategy.
Concessional contribution limits
Budget decisions: In last year’s budget, the government announced that from 1 July 2012 the limit on pre-tax (concessional) contributions for the over 50s would be cut from $50,000 to $25,000. There was an exception for individuals over 50 with a superannuation balance of less than $500,000 who would still be able to contribute up to $50,000 pre tax. This year’s budget deferred this change until 1 July 2014. In the period up until the new start date in 2014, the pre-tax contribution limit for all individuals, regardless of age and account balance, will be $25,000.
What this means:
Employers – Employers’ existing arrangements may lead their higher earning employees to exceed the pre-tax contribution limit. Aon Hewitt’s research has identified that almost two thirds (64%) of organisations pay superannuation on salaries above the maximum salary base on which the Superannuation Guarantee must be paid. Further, some organisations pay the fund administration costs for their employees and some also pay for employees’ insurance through their superannuation. These payments are included as a pre-tax superannuation contribution for the employee.
Employers should review and amend (if required) their current policies and practices to identify where employees risk breaching pre-tax contribution limits. To assist their higher earning employees they might also consider offering them remuneration planning services.
Financial advisers – Financial advisers should identify their clients who may risk exceeding their pre-tax contribution limits. This will include all those who made pre-tax contributions of more than $25,000 in 2011-12 and other high income earners. Advisers should consider contacting these clients and helping them to ensure they do not exceed their contribution limits.
Individuals - High income earners should monitor their superannuation contributions to ensure they do not exceed the $25,000 limit. Individuals with earnings of more than $277,778 plus 9% superannuation will automatically exceed this limit. Many individuals would benefit from seeking financial advice to ensure they are not liable for high tax penalties incurred from breaching contribution limits.
Budget decision: The Federal Government’s previously proposed changes to the living-away-from-home allowance (LAFHA) have been included in the 2012-13 budget despite the fact that the government is yet to finalise the details and pass the legislation.
Prior to the budget, the Government had announced that they will:
Last night’s budget included further amendments to LAFHA:
The government has assumed in its 2012-13 budget that these changes will be legislated and take effect from 1 July 2012.
What this means: These changes could make it more difficult to recruit much needed talent from overseas. LAFHA plays a significant role in the recruitment of overseas talent to fill gaps in the Australian market. An Aon Hewitt survey found that LAFHA is currently most commonly offered to employees in key technical/specialist positions.
Organisations are concerned that the proposed changes will make it more difficult to attract overseas talent. They are also expected to increase remuneration costs for new overseas recruits. Our research shows that many organisations will consider compensating their employees if there is a financial impact. Planned methods of compensation include increasing fixed pay and offering an allowance to at least partially offset the loss of earnings.
Budget decisions: The budget announced that it would be broadening its current mature aged workers program (ie those aged 50 or more) from 1 July 2012. Currently, employers can be reimbursed $2,000 for a skills assessment for a mature worker in a trade occupation and $2,000 for training costs on completion of gap training. This will be changed to $3,000 and $1,000 respectively and extended to mature aged workers in all occupations.
Employers will receive a new bonus of $1,000 when they recruit a mature aged worker who completes at least 13 weeks of employment.
What this means: Mature workers are now a more attractive talent pool for employers, even if they require training, as employers will receive reimbursement for at least some of their training costs. This might help employers who are having difficulty attracting the workers they need.
There are an increasing number of older Australians who want to work, and need to work for financial reasons. However, most salary continuance policies, and some death and total and permanent disablement policies only provide cover for employees up to age 65. The lack of insurance cover for mature workers could be seen as a form of age discrimination. It is also a partial disincentive for people staying in the workforce longer. Organisations should consider seeking to extend the age limits in their insurance cover to ensure all employees are provided with some protection.
Employment termination payments
Budget decisions: Tax concessions for certain termination payments will be reduced. Current concessions will continue for genuine redundancies, invalidity, death and employment disputes. However, for all other employment termination payments the concessional tax rates will not apply for amounts that take a person’s income over $180,000. Amounts above this will be taxed at their marginal tax rate. This change will take effect from 1 July 2012.
What this means: Employers could be under pressure to increase termination payments for those affected by this change who will seek to be compensated for the increased tax. Employees may request that their planned termination is brought forward so that they are not subject to the new tax rates.
Budget decisions: All businesses that are taxed like companies (regardless of size) can carry back tax losses of up to $1 million. The change will apply to losses in 2012-13 which can be offset against profits in 2011-12. From 2013-14, losses can be offset against profits in the previous two financial years.
Small businesses (ie those with aggregated turnover of less than $2 million per annum) will also be able to immediately write off business assets costing less than $6,500 from 1 July 2012. Previously this write off option only applied for assets up to $1,000. Small businesses can also claim up to $5,000 as an immediate deduction for new or used motor vehicles from 1 July 2012.
Despite proposed changes to company tax rates in last year’s budget there has been no change to company tax rates.
What this means: There is a new incentive for businesses to invest for growth.
Budget decisions: The proposal to require financial advisers to comply with the Tax Agent Services Act 2009, from 1 July 2012 has now been deferred until 30 June 2013.
What this means: Financial advisers can continue to provide advice relating to taxation without being a registered tax agent until 30 June 2013. However, advisers will still need to refer their clients who want to act on this advice to a tax agent.
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This budget summary was prepared and issued by Aon Hewitt Limited (ABN 48 002 288 646, AFSL 236667).
©May 2012 Aon Hewitt Limited