Budget 2011 – Individuals & Families

Key budget changes 2011

By Jarrod Rogers CPA, May 2011

Superannuation

Super contributions limits for over 50s

The government has confirmed that a higher concessional contributions cap will apply to people over 50.

Currently the concessional contributions cap is $25,000, but for people over 50 the limit is $50,000. This allows people over 50 to use salary sacrifice to boost their super in the lead up to retirement.

The special rule for over 50s was set to expire at the end of 2011-12.

The new rules from 2012-13 will set the concessional cap for over 50s at a level permanently $25,000 higher than the usual cap.

This means the cap will start at $50,000 and will be indexed in $5,000 increments along with the base level cap.

However, the higher cap will only apply to taxpayers who have less than $500,000 in their super.

STRATEGIC OPPORTUNITY:

the spouse super splitting contributions can help keep your super balance below $500,000. Each year you can choose to split 85% of your super contributions to your spouse.

If your balance stays below $500,000 you can continue to use the higher $50,000 contributions cap and maximise tax savings of salary sacrifice.

Super Co-Contribution Limits

The super co-contribution has become even less generous.

The current government cut the co-contribution rate from $1.50 to $1.00 for every $1.00 contributed. Initially, they promised to steadily increase the ratio back to $1.50, but later backflipped.

Now, they have decided that the income tests for the co-contribution will again stay the same. If you consider inflation, then the limits have actually become lower in real terms.

For a full co-contribution your income (assessable income plus adjustments like fringe benefits and reportable super contributions) needs to be under $31,980. The entitlement reduces by 3.33 cents for every dollar over $61,980

See the ATO website for other eligibility criteria.

Excess Superannuation Contributions—Refund Opportunity

The Government will provide eligible individuals with the option to have excess concessional contributions taken out of their superannuation fund and assessed as income at their marginal rate of tax, rather than incurring excess contributions tax.

· This change commences from next financial year (2011-12).

· You can only use this rule once. If you breach the cap a second year you won’t be able to ask for the refund.

· Only applies if you have breached the cap by less than $10,000

This option will prove attractive for most taxpayers. The penalty rate for breaching the contribution caps is 46.5%. Any taxpayer earning less than $180,000 will be better off incurring tax at their marginal rate.

Family Assistance

Family Tax Benefit Changes

Family tax benefit part A will no longer be paid once a child turns 21. The previous limit was 24.

The amount of payments to teenage children previously dropped at age 16. It will now remain the same as the rate for a 15 year old but certain eligibility criteria will apply.

The current income limits for all payments will not be increased for indexation. Including inflation this means that the eligibility limits have effectively been lowered.

Education Tax Refund to include school uniforms

Education tax refund has been extended to include school uniforms. This is a vote buying measure first raised during the election campaign.

The current rules allow parents to claim 50% of certain expenses including computers, stationery, internet, software and books.

A per child limit applies to the total claim. There is an expense limit of $794 per primary school child and $1,588 per secondary school child. This means the maximum 50% claim is $397 and $794 for primary and secondary students respectively.

Other changes

Restrictions to the Dependant Spouse Tax Offset

The Dependant Spouse Tax Offset is available to taxpayers who have a low income spouse (currently defined as having income under $13,800).

The tax concession is not available where the spouse is receiving family tax benefit part B.

Beginning next tax year (2011-12) this offset will not be available where the spouse is less than 40 years of age.

This is part of a policy to progressively remove this offset altogether.

My view:

This won’t affect many couples, as the majority of non-working spouses under 40 are stay at home mums who don’t qualify for the offset anyway because they receive family tax benefit.

Students

Deductions against government assistance payments

The ATO recently lost a case in the high court brought by a student taxpayer who was receving Youth Allowance. The student claimed her study expenses as a deduction against her taxable Youth Allowance payments because she was required to study to be eligble for Youth Allowance.

The High Court ruled in favour of the taxpayer. Many experts thought that this might open the door for other welfare recipients to claim deductions.

But the ATO, always a sore loser, has trumped the court’s decision by introducing legislation to disallow such deductions.

So from 1 July 2011 a taxpayer cannot claim a deduction for expenses incurred in meeting the requirements of their Centrelink benefit.

HELP (aka HECS) discount reduced

Upfront discount

When a student elects to pay their HECS debt up front they are eligible for a discount on the total amount.

It used to be 25%, was cut to 20% and the current budget propose a further cut to just 10%.

Discount for voluntary repayments

A HELP debt is most commonly repaid via compulsory repayments. When a student earns over a certain threshold ($44,912 for 2010-11 and $47,196 for 2011-12) they must repay part of their HELP debt. The repayment percentage increases with income.

At any time during or after uni a student can choose to pay an additional amount off their debt. Any voluntary repayment used to receive a 10% discount. This has been cut to 5%

My view:

Your HELP/HECS debt does not incur any interest. It is simply indexed with inflation. So while it might appear to get bigger in dollar terms, you do not lose anything in purchasing power.

In fact, the government measure of inflation doesn’t always reflect actual cost of living, so your debt might even be shrinking in real dollar terms.

So I never advise voluntary repayments. With an inflation-adjusted interest rate of 0% you’re better off paying off any other debt first (credit car, car loan, personal loan, home mortgage). Even if you are debt free, your cash is better off earning some interest.

However, due to an administrative loophole, when you only have one year left on your HELP debt you should pay this amount as a “voluntary payment” so you get the 5% discount. This is because, unlike earlier voluntary payments, you are paying less in the long run.