Capitalise on Budget tax changes

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Advisers need to arrange meetings with their clients, especially those with families and young children, to discuss what Budget changes will mean for them.

Phil Anderson from the AFA says advisers need to ensure their clients understand the benefits and how to use them. “Those increases that might have flowed through have been put back, so I think there’s a little bit of work for advisers in talking to their clients – in particular, families – about some of the issues that flow out of the budget. But we’re not talking about huge issues or huge changes.”

One such change is the increase in the Medicare Levy by half a percentage point from 1.5% to 2% from 1 July, 2014.

While this announcement will increase the amount of Medicare Levy people will pay on their taxable income, Colonial First State FirstTech says it will also increase the tax rates applicable to other amounts that include the Medicare Levy rate. These include:

  • Excess non-concessional contributions tax – 46.5% to 47%
  • Tax on the taxable component of a superannuation lump sum benefit received by a taxpayer age 55 to 59 in excess of the low rate cap (currently $175,000) – 16.5% to 17%
  • Tax on the taxable component of a superannuation lump sum benefit received by a taxpayer under the age of 55 – 21.5% to 22%
  • Tax on the taxable component of a superannuation lump sum death benefit paid directly to a non-death benefits dependent
    • taxed element – 16.5% to 17%
    • untaxed element – 31.5% to 32%
  • Withholding tax on financial investments where no TFN is provided – 46.5% to 47%
  • Fringe benefits tax – 46.5% to 47%.

However, the increase in the Medicare Levy may also improve the tax effectiveness of a number of strategies, says FirstTech. These include:

  • Making salary sacrifice and personal deductible contributions more tax effective, as the Medicare Levy does not apply to these amounts
  • Delaying the withdrawal of any taxable component as a superannuation lump sum benefit until after age 60, as the Medicare Levy does not apply to these amounts
  • Arranging for a member’s death benefit to be paid to a non-death benefits dependent via the member’s estate, as the Medicare Levy does not apply to deceased estates

The net medical expenses tax offset (NMETO) will also be phased out. However, it will still be available for taxpayers for out-of-pocket medical expenses relating to disability aids, attendant care or aged care until 1 July 2019.

Taxpayers who claimed the NMETO for the 2012‑13 income year could still be eligible for the NMETO for the 2013‑14 income year, and those who claim the NMETO in 2013‑14 will continue to be eligible for the NMETO in 2014‑15.

Clients considering elective medical procedures that qualify as eligible out-of-pocket medical expenses – i.e. major dental procedures – may wish to bring forward the procedure and incur the expense in the 2012-13 financial year. This way they may be able to remain eligible for the NMETA for future years under the transitional arrangements.

Another change affecting families is the Baby Bonus cut. The $5000 payment for the first child will be replaced with a means-tested $2000 payment, with payments for following children down to $1000. The children's payments will be in the form of an increase in the FTB-A and will be means-tested to an income of around $110,000 per year.

Tony Abbott will give his reply to budget speech tonight, and is expected to allow the cut to go ahead.

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