Things to consider as a result of the 2006 Federal Budget

Changes to the income tax thresholds

The Government has proposed changes to the personal tax rates and income thresholds that will come into effect on 1 July 2006, as summarised in the following table:

Fringe Benefits Tax

• From April 1, 2006 the FBT rate reduces from 48.5% to 46.5%
• From April 1, 2007 the in house FBT tax free threshold will increase from $500 to $1,000.

Things to consider

• For higher income earners, where the top marginal tax rate will decrease, consider pre paying deductible expenses. For example prepay interest in advance on an investment loan or prepay 12 months personal income protection.
• The lower marginal tax rates for higher income earners will effect negative gearing decisions.
• Making investments in the name of an income earner who is on a lower tax rate will have further tax benefits.
• Salary packages should be reviewed as the changing marginal tax rates and fringe benefit tax rates could impact on net income.

Superannuation

The key changes to Superannuation are:

• Superannuation benefits either as a lump sum or income stream will now be tax free for people of the age of 60.
• The Reasonable Benefit Limit, the maximum amount a person can take as concessionally taxed benefit will be abolished.
• All lump sum death benefits will be tax free if paid to a dependent.
• Transferring between superannuation funds will be made simpler.
• People up to the age of 75 will now be able to make deductible contributions to superannuation.
• Aged based contributions to be abolished and replaced with a single contribution limit of $50,000. There is to be a transitional period for people aged 50 and over. Any contributions made beyond the $50,000 limit will be taxed at the top marginal tax rate.
• Undeducted contributions will be capped at $150,000 per year. This cap may be averaged over three years to allow a larger one off payment.

Things to consider

• If possible, delay retirement until after July 1, 2007 and after the age of 60.
• Once you are over the age of 60, considering that superannuation benefits will not be included in assessable income, you may pay less tax on other assessable income.
• If you are not yet 60 and receiving a pension, there could be an opportunity for you to roll it into a new pension on or after July 1, 2007.
• Even though superannuation benefits will be tax free after the age of 60, and lump sum death benefits are tax free if paid to a dependent, there are still issues for you to consider from an estate planning perspective.
• If you fall into the transitional period for aged based deductible contributions ie 50 years or older, opportunity may exist for you to make a superannuation contributions of up to $100,000 per year prior to July 1, 2012.
• For those over 65, there is an opportunity to contribute up to $450,000 prior to 30 June 2005 – special rules apply to please contact us first prior to proceeding.
• Review your salary sacrifice position. The $50,000 limit on concessional deductible contributions may limit the amount you can contribute through salary sacrifice given that the employed superannuation guarantee counts towards this amount.

Small Business

Depreciation – increase in prime cost rate from 150% to 200% to bring Australian depreciation deductions in line with overseas depreciation rates.

Simplified tax system – businesses with turnover up to $2 million (previously $1 million) will now be eligible for the STS.

Capital Gains Tax – changes to the small business CGT concessions include ;

The net asset test will increase from $5 million to $6 million.

The 50% controlling individual test will be replaced with 20% significant individual test.

Please note that these proposed changes will only be applied to CGT events that occur in the 2007 tax year and beyond.

We strongly suggest that you review your investment portfolio and retirement strategy. Please give us a call to discuss the implications of the budget and how it may effect your situation.