Market Wrap 16.05.2012

Federal Budget 2012

The 2012 Federal Budget only contained a few surprises as many of the measures had already been legislated or pre-announced. The main winners were lower income earners, families and the elderly.

Summary

The key new announcements include:

• Tax may increase on certain employment termination payment
• The reduction in the company tax rate isn't going ahead
• The increase in the concessional contribution cap for people aged 50 or over with less than $500,000 in super will be postponed until 1 July 2014 
• The tax payable on concessional super contributions by people earning $300,000 pa or more will increase from 15% to 30%, and
• A 'SchoolKids Bonus' of $820 a year for each child at high school and $410 for every child in primary school will automatically be paid to parents who are eligible for Family Tax Benefit Part A, replacing the Education Tax Refund.

The Government has also confirmed that:

• people earning under $80,000 pa will receive modest tax cuts
• the minimum income payments for a superannuation pension/income stream won't increase until 1 July 2013, and
• funding will go ahead for the landmark changes to Australia's Aged Care System announced recently.

Superannuation Highlights

Contribution Tax changes

As the Government had hinted before the Budget, the tax concession for superannuation contributions by high-income earners has been cut.

From 1 July 2012, individuals with income greater than $300,000 will be taxed at 30% on their superannuation contributions (up from 15% and excluding the Medicare levy).

The definition of ‘income’ for the purpose of concessional contributions for those earning over $300,000 will also be changed.

The measure will provide savings to the Budget of $946.5 million over the forward estimates. It is estimated that it will affect around 128,000 people in 2012-13, or 1.2 per cent of people contributing to superannuation.

The definition of ‘income’ for the purpose of this measure will include taxable income, concessional superannuation contributions, adjusted fringe benefits, total net investment loss, target foreign income, tax-free government pensions and benefits, less child support.

If an individual’s income excluding their concessional contributions is less than the $300,000 threshold, but the inclusion of their concessional contributions pushes them over the threshold, the reduced tax concession will only apply to the part of the contributions that are in excess of the threshold.

For example, someone with income excluding their concessional contributions of $285,000, and concessional contributions of $20,000 (taking their total income to $305,000), would have the reduced tax concession only apply to $5000 of their contributions.

‘Concessional contributions’ for the purpose of this measure include all employer contributions (both superannuation guarantee and salary sacrifice contributions) and personal contributions for which a deduction has been claimed. For members of defined benefit funds (both funded and unfunded schemes), it will include all of their notional employer contributions.

The reduced tax concession will not apply to concessional contributions, which exceed the concessional contributions cap and are therefore subject to ‘excess contributions tax’. These contributions are effectively taxed at the top marginal tax rate and therefore do not receive a tax concession.

Treasury will consult with the superannuation industry and other relevant stakeholders on further design and implementation details.

Concessional contributions cap

The Government will defer the start date of the higher concessional contributions cap measure by two years, from 1 July 2012 to 1 July 2014.

Under the originally proposed higher concessional contributions cap measure, individuals aged 50 and over with superannuation balances below $500,000 would have been able to contribute up to $50,000 in concessional contributions – but this has been deferred!

The two-year deferral means that for 2012-13 and 2013-14, all individuals will only be able to make concessional contributions of up to $25,000 per year. In 2014-15, the concessional cap is expected to increase to $30,000 through indexation, and the higher cap (after the deferral period) would then commence at $55,000.

In consultations on the implementation of the higher cap, the superannuation industry raised concerns in relation to the cost and complexity involved in administering the balance limit, and the difficulty some individuals may face in determining whether they are eligible for the higher cap.

One reason for the deferral is to help individuals to be able to more easily determine whether they are eligible for the higher cap from 1 July 2014, as the ATO is developing an online reporting facility that will provide access to comprehensive account balance information from early 2014.

Deferring the start date of the higher concessional contributions cap will save $1.46 billion over the forward estimates.

Indices:

The All Ordinaries Index has moved down over the past week increasing 116 points (or -2.6%).

The rest of the world as measured by the MSCI index is down 21 points (or -1.7%).