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A Guide to the 2007 Federal Budget.
Date: Wednesday, 9th May, 2007. Source: Garvan Financial Planning. Author: Threesixty Technical Team.
The 2007 Federal Budget contained measures of interest for families, investors and those planning retirement. These include:
- An increase in the personal income tax thresholds over the next two financial years.
- An automatic doubling of co-contribution entitlements for 2005/06.
- A range of family benefit and social security enhancements.
- A simplification of means testing for aged care residents.
Now is a good time to revisit your financial plan to work out the best way of using the extra cash flow and incentives to maximise the chance of meeting your financial goals.
Personal taxation changes
Personal income tax threshold increases
The Government announced changes to the personal income tax thresholds, which will boost disposable income for most Australian taxpayers. The changes are scheduled to come into effect over the next two financial years:
- From 1 July 2007, the 30% threshold will increase from $25,001 to $30,001.
- From 1 July 2008, the 40% threshold will increase from $75,001 to $80,001, and the 45% threshold will increase from $150,001 to $180,001.
Low income tax offset enhancements
From 1 July 2007, the maximum low income tax offset will increase from $600 to $750 per year. In addition, the income threshold at which the offset begins to reduce will increase from $25,000 to $30,000. As a result:
- The amount of tax-free income low-income earners can receive each year will increase from $10,000 in 2006/07 to $11,000 in 2007/08, and
- The upper limit to which a partial offset can be claimed will increase from $40,000 to $48,750.
Dependent spouse rebate changes
This rebate benefits taxpayers who have no dependent children, but a dependent spouse receiving a low income. From 2007/08 onwards, the rebate will increase from $1,655 to $2,100. This change allows the dependent spouse to earn more income before the rebate is completely phased out.
To qualify for the rebate, the dependent spouse must earn a separate net income of less than $8,681 pa. The full rebate is received when the dependant spouse’s separate net income is $282 pa or less.
Tax-free incomes for older Australians
From 1 July 2007, senior Australians eligible for the senior Australians tax offset will be able to earn more income without paying tax. Singles will be able to have taxable income up to $25,867 (up from $24,867) and couples up to $43,360 combined (up from $41,360).
Increase in Medicare Levy thresholds
For the current (2006/07) financial year, the Medicare Levy low-income thresholds will increase, as follows:
| Medicare Levy low-income thresholds | 2005\06 | 2006\07 | Increase |
|---|---|---|---|
| Individuals | $16,284 | $16,740 | $456 |
| Families | $27,478 | $28,247 | $769 |
| Additional threshold* | $2,523 | $2,594 | $71 |
| Pensioners below Age Pension age** | $19,583 | $21,637 | $2,054 |
*The low-income threshold is increased by this amount for each dependant child.
**This applies to taxpayers below Age Pension age receiving certain taxable Government pensions and allowances.
How could the personal taxation changes affect you?
- Most Australian taxpayers will receive a boost to disposable income
- Investing in the name of a lower income earner (income splitting) will become even more tax-effective.
- If your marginal tax rate changes from 45% to 40% from 1 July 2008, you should review certain strategies, such as negative gearing and salary packaging.
- If you are aged 60 or over and will receive tax-free income stream payments from super from 1 July 2007 (these do not have to be included in your tax return), you may be even better off in 2007/08 and beyond due to the reduction in tax payable on your non-super investments.
To illustrate the impact of the changes to the personal income tax thresholds and low income tax offset, the following table shows the amount of tax payable in 2006/07, 2007/08 and 2008/09 for a range of taxable incomes. Also shown is the tax saved in future financial years when compared to the current (2006/07) financial year.
| Taxable income | 2006/07 Tax payable* | 2007\08 | 2008/09 | ||
|---|---|---|---|---|---|
| Tax payable* | Tax saved** | Tax payable* | Tax saved** | ||
| $20,000 | $1,500 | $1,350 | $150 | $1,350 | $150 |
| $60,000 | $13,350 | $12,600 | $750 | $12,600 | $750 |
| $100,000 | $27,850 | $27,100 | $750 | $26,600 | $1,250 |
| $140,000 | $43,850 | $43,100 | $750 | $42,600 | $1,250 |
| $180,000 | $61,350 | $60,600 | $750 | $58,600 | $2,750 |
*Does not include the Medicare Levy, or tax offsets other than the low income tax offset.
**In relation to 2006/07 year.
Superannuation changes
Additional Government co-contribution for 2005/06
The Government will double the co-contribution entitlement for those persons who made personal after-tax (undeducted) contributions in 2005/06 and met the relevant eligibility criteria. The co-contribution payments for 2005/06 are yet to be paid to superannuation funds, but in most cases will be paid before 30 June 2007.
Family Law CGT relief for small super funds
Currently, if certain conditions are met, CGT rollover relief is available if an asset is transferred between small super funds for one spouse as a result of a Family Law payment split. However, this rollover relief is only available on the portion of the asset(s) related to the payment split.
Under the Budget proposals, from 1 July 2007, the CGT rollover relief will be extended to include all assets transferred in specie for one spouse from one small super fund to another.
Changes to Commonwealth super schemes (PSS/CSS)
From 1 July 2008, PSS members will be offered choice of superannuation fund. Both PSS and CSS members will no longer be required to make mandatory after-tax contributions, but this may reduce Government (as employer) contributions and end benefits.
How could the superannuation changes affect you?
- Some people will benefit from a maximum one-off of government payment of $3,000 into their super fund. As the co-contribution initiative relates to 2005/06 only, if you did not make an undeducted contribution in that year you will not qualify for the additional co-contribution.
- The family law CGT relief measure for small super funds will save tax and allow the complete separation of assets where a marriage breakdown has occurred.
- CSS and PSS members will have more flexibility with their superannuation benefits.
Family benefits
Child Care Tax Rebate (CCTR) changes
Currently the amount of CCTR cannot be determined until the claimant’s income for a year is known and their tax return is processed. Once the rebate of 30% of out-of-pocket child care expenses for approved care has been determined, it is used to offset the tax payable in the financial year following the one in which the expenses were incurred. For example, the rebate relating to expenses incurred in 2005/06 is used to offset tax payable in 2006/07. Furthermore, where a couple have insufficient tax liabilities to use their full CCTR entitlement, they do not receive the full rebate.
From 1 July 2007, the Government will bring forward the payment of the 30% CCTR so that families will receive CCTR as an annual direct payment from the Family Assistance Office (FAO).shortly after the year in which the child care costs have been incurred.
The change to direct payment could mean a one-off double payment of over $8,000 per child in 2007/08 consisting of:
- Up to $4,096 per child for costs incurred in 2005/06 on processing the 2006/07 tax return, and
- Up to $4,211 per child for costs incurred in 2006/07 through the Family Assistance Office (FAO).
In addition, because CCTR will become a payment rather than a tax offset, the entitlement will no longer depend on the claimant having sufficient tax liabilities to make use of the offset.
Child Care Benefit (CCB) increased
CCB is a subsidy for those paying for child care. From 1 July 2007, it will be increased by 10%. Combined with the effect of indexation of the benefit, the maximum increase is $20.50 per child per week. There may be a proportionate decrease in the child care tax rebate (see above), as out of pocket costs will be lower than they otherwise would be.
How could the changes in family benefits affect you?
- Families will benefit from the receipt of the child care “tax rebate” as a direct payment shortly after the income year in which the costs have been incurred instead of waiting until the following year.
- The change in the payment system could mean a one-off double payment of over $8,000 per child as the child care “tax rebate” in 2007/08.
Social security changes
Carer Bonus announcement
People in receipt of either Carer Payment or Carer Allowance as at 8 May 2007 will receive a one-off, non-means tested tax-free payment. These amounts, which will be paid in June 2007, are:
- $600 if eligible for Carer Allowance,
- $1,000 if eligible for Carer Payment,
- $1,600 if eligible for both Carer Payment and Carer Allowance, or
- $1,600 if eligible for Carer Allowance and either Wife Pension or DVA Partner Service Pension.
Seniors Bonus Payment announcement
Most people who are of Age Pension age or, for veterans, of Service Pension age will receive a one-off tax-free payment of $500 before the end of June this year. These people must be qualified, as at 8 May 2007, to receive either the Utilities Allowance or Seniors Concession Allowance (which is paid to persons holding a Commonwealth Seniors Health Care Card or DVA Gold Card). It will also be paid to people not of pension age who receive Widow Allowance, Partner Allowance or Mature Age Allowance as at 8 May 2007.
Funeral bond means test exemption threshold increases
The funeral bond assets test exemption threshold will increase from $5,000 to $10,000 per person and will be indexed in future. This measure will apply to bonds purchased from 1 January 2008 and, from that date, to existing bonds valued between $5,000 and $10,000. Investors will be able to have two funeral bonds exempted within the $10,000 total.
Pension Bonus Scheme (PBS) changes
The bonus is based on the age or age service pension payable at the time of claim. The surviving partner of a deceased PBS participant will be allowed to receive the deceased partner’s unclaimed bonus. Also, the bonus will increase if the participant’s pension increases within 13 weeks of claim and the member will be able to take periods of leave from work and still remain a member.
Aged care changes
Simplified means testing of income and assets
Currently, self-funded retirees pay higher income-tested fees for daily care in an aged care facility because nearly all of their income is counted under the income test. However social security pension income is not counted for pensioners.
From 20 March 2008, a new income test will apply to both new and existing residents in low and high care facilities. The test will treat all people in the same way and all assessable income the same, irrespective of whether it is a social security pension or private income. Fees for existing residents will not be increased as a result of this measure, but they may be reduced.
In the same way, assets testing to determine accommodation costs will also be simplified. Self-funded retirees entering high care will pay the same level of means tested accommodation charge as pensioners with the same level of assets. Charges for existing residents will not change but some new residents will pay a slightly higher charge.
Contact your financial adviser/planner
For further clarification on any of the above changes or for assistance with how they may impact your personal situation, please contact your financial adviser/ planner.
- Garvan Financial Planning
The advice contained herein does not take into account any persons particular objectives, needs or financial situation. Before making a decision regarding the acquisition or disposal of a Financial Product persons should assess whether the advice is appropriate to their objectives, needs or financial situation. Persons may wish to make this assessment themselves or seek the help of an adviser. No responsibility is taken for persons acting on the information provided. Persons doing so, do so at their own risk. Before acquiring a financial product a person should obtain a Product Disclosure Statement (PDS) relating to that product and consider the contents of the PDS before making a decision about whether to acquire the product.
GWM Adviser Services Limited ABN 96 002 071 749 trading as Garvan Financial Planning, registered office 105—153 Miller Street North Sydney NSW 2060, is an Australian Financial Services Licensee and member of the National Australia Bank group of companies. From time to time Garvan Financial Planning, members of the National Australia Bank group of companies, associated employees or agents may have an interest in or receive pecuniary and non pecuniary benefits from the financial products and services mentioned herein.
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