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Wednesday, May 18, 2011

Are you a winner from the 2011 Australian Budget?

The Gillard Government's first budget walked the fine line between keeping onside with a fickle electorate, while making progress toward future surplus targets. In the areas of tax, superannuation and social security, the result was a series of relatively low risk 'tweaks' to existing programs, rather than any serious slashing reforms.

It seems not to have upset too many vested interests and on the plus side, there were some limited wins for small business, retirees and income earners. In looking at these changes it is important to remember that most measures are proposals only and further changes could be made. Legislation is still required to be passed.

Although the lack of dramatic announcements may have discouraged people from digging through the detail, there are rewards to be had if you know where to look.

Concessional super contribution gains
A case in point is a small but potentially important change that may appeal to those who are taking full advantage of concessional contribution limits to load their super. Previously, contributions made in excess of the cap were penalised with a potentially higher rate of excess contributions tax. From 1 July 2011, any 'first time offenders' who overstep the concessional contributions cap by up to $10,000 can request the excess contributions be refunded and assessed at their marginal rate of tax, rather than at the higher 'excess contribution' tax rate.

Over 50s with less than $500,000 in super assets now have more certainty on potential future indexation increases to the cap. The transitional cap for this group is currently at $50,000. The good news is that any indexation increases in the $25,000 base cap from 1 July 2012 will have a matching increase in the higher cap, thereby allowing for greater overall increase in cap level.

Account based pension relief
Retirees also stand to benefit if they have account-based pension investments. Over the last 3 years these types of investments have benefited from a 50% reduction in minimum amount of income that the account holder was obligated to draw down. This allowed them to preserve more capital to help them recover from the effects of the GFC. There was some fear that this relief would disappear in this budget, but fortunately it has been retained for another year, albeit at a lower level of 25%. For someone aged between 65-74, for example, this means they need only drawdown 3.75% of their investment, rather than the standard 5%.

The superannuation co-contribution thresholds would remain frozen until 30 June 2013. The co-contribution scheme gives dollar for dollar contribution support for those earning up to $31,920 who are contributing after tax dollars to their super. The Government will chip in up to $1,000 for these people. Those earning higher incomes can also receive a lower level of co-contribution support - phasing out to zero at an income of $61,920.

Tax changes worth noting
On the tax front, a range of relatively small but important adjustments have been made to both personal and business tax regimes.

Taxpayers with a dependent spouse aged less than 40 years will lose the dependent spouse tax offset from 1 July 2011, unless they are a carer, an invalid, or are permanently unable to work. Those with children and who are eligible for Family Tax Benefit B, (or eligible for the zone, overseas forces or overseas civilian tax offsets), will also not be affected by this change.

Families would receive some tax relief if they have 16-19 year olds that are in full-time secondary study, or the vocational equivalent. From 1 January 2012 they will receive up to $160 extra per fortnight through Family Tax Benefit (FTB) Part A for each eligible teenager. There will also be more flexibility around obtaining advance payment of up to $1,000 of FTB Part A entitlements.

Reforms to the Low Income Tax Offset (LITO) include an increase in the amount of the offset that can be taken in weekly pay packet, rather than waiting for the end of year tax return. Abuse of the system by those attempting to avoid income tax has been stopped by closing the loophole that allowed diversion of dividends, interest and rent income to a non-working minor, who could previously have had access to the LITO provisions for non-work related income.

Small business wins a tax break!
Small business owners achieved some notable budget bonuses, starting with an immediate tax deduction of up to $5,000 for motor vehicles bought from 2012/13 onwards. An increase in the immediate tax deductible amount will also apply to assets valued at under $5,000, up from a previous level of $1,000. Incorporated small businesses will benefit further with a reduction in company tax rate to 29 per cent.

If you want to know more about how the 2011 Budget may affect you and your family, or to set up your financial affairs for a more profitable financial year, contact RI Advice Group on 03 9471 0080 before 30 June 2011 – we are ready to help.

Hugh Kilpatrick is an Authorised Representative of RI Advice Group Pty Limited ABN 23 001 774 125, AFSL 238429. This article does not consider your personal circumstances and is general advice only. You should not act on any recommendation without considering your personal needs, circumstances and objectives. We recommend you obtain professional financial advice specific to your circumstances. This information is correct as at 13 May 2011.