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Federal Budget Update – Taxation Changes

Article By Adam Hurwood | | Accounting & Tax

Increase in the Medicare Levy Low Income Thresholds

Effective date: Current financial year

The Government has announced new Medicare Levy thresholds that are applicable for the current financial year (ending 30 June 2013). These are $20,542 for individuals (previously $19,404) and $33,693 for families (previously $32,743). The increase on these thresholds for each dependent child or student will be $3,094.

The low income threshold for single pensioners below aged pension age has been increased to $32,279 for the year ending 30 June 2013. This will ensure such pensioners do not pay the Medicare Levy when they do not have an income tax liability.

Increase in the Medicare Levy for DisabilityCare Australia

Proposed date: 1 July 2014

As announced in the lead up to the Federal Budget, the Government will increase the rate of the Medicare Levy by 0.5% from 1.5% to 2.0% of taxable income from 1 July 2014. This increase will be used to fund DisabilityCare Australia (previously known as the National Disability Insurance Scheme).

This increased levy will apply to all taxpayers who are subject to the Medicare Levy based on their taxable income and will result in a reduction of after tax income. The following table shows the additional amount of overall tax that will be payable on certain levels of taxable income.

Net Medical Expense Tax Offset

Proposed from 1 July 2013

In the 2012 Budget, the Government proposed it would introduce a means test for the Net Medical Expenses Tax Offset whereby those with adjusted taxable income above the Medicare Levy surcharge thresholds would only be able to claim medical expenses over a threshold of $5,000 instead of $2,060. Furthermore, the offset they may claim was proposed to be 10% of the expenses above the threshold instead of 20%.

In the 2013 Budget, the Government has now decided that from 1 July 2013 the NMETO will be phased out completely.

Whilst the NMETO will continue to be available until 30 June 2019 for out of pocket medical expenses related to disability aids, attendant care or aged care expenses, it will only be available for the year commencing 1 July 2013 if a claim is made for the current year (i.e. the year ended 30 June 2013). If a claim is made in the year commencing 1 July 2013, then it will also be available in the year commencing 1 July 2014, but not thereafter.

Importantly, any claims to be made in the years commencing 1 July 2012, 2013 or 2014 will still be subject to means testing thresholds introduced in the 2012 Budget.

Limitations on Deductions for Work-Related Self-Education Expenses

Proposed from 1 July 2014

Announced on 13 April 2013, an annual cap on the deduction for work-related self education expenses will apply from 1 July 2014. Deductions will be limited to $2,000 per annum.

This change applies to individuals seeking to claim such deductions, and may have a significant impact on self employed people running their own businesses. It may lead to a trend to corporatise such businesses so as to not limit the deduction. This is because where the expense is paid by an employer on behalf of an employee, the benefit is exempt from fringe benefits tax (FBT) and the employer is entitled to a full deduction.

However, the Government has indicated that where an employee now chooses to salary sacrifice towards these forms of education expenses, the FBT exemption will no longer apply.

Changes for Non-Resident Taxpayers on Sale of Australian Property

Proposed from 1 July 2016

With effect from 1 July 2016, where a non-resident sells a property located within Australia, a new (non-final) withholding tax regime will apply. This measure is designed to ensure that the appropriate amount of tax is recovered by the Australian Government on taxable capital gains that arise when such properties are sold.

These measures will apply to all Australian taxable property, other than:

  • where the property is owned and sold by an Australian resident (i.e. it applies to non-resident taxpayers only)
  • residential properties valued at less than $2.5 million.

Under this measure, the purchaser of the property will need to withhold 10% of the purchase price and forward it to the ATO as a form of withholding tax. As a result, the vendor will only receive 90% of the sale proceeds up-front. They will need to lodge a tax return if they want to receive any of the remaining 10%.

As an example, if a non-resident purchased a factory today for $1 million and sold it in two years time for $1.1 million, the non-resident would only receive 90% of the sale price (i.e. $990,000) with the remaining 10% (or $110,000) withheld by the purchaser and remitted to the ATO.

If, as a result of their Australian tax position, the non-resident was entitled to a refund of some of the $110,000 withheld, they would need to lodge a tax return with the ATO in order to receive that refund.

Given that the $110,000 withheld exceeds the amount of the actual gain made on the sale of the property, it will likely lead to an increased level of compliance by non-residents with requirement to lodge Australian income tax returns.

Alternatively, non-residents may not be as ready to dispose of these properties in the future, or will look to achieve an increased sale price to compensate for the amount of tax withheld.

Removal of Discount for Early HELP Payments

Proposed from 1 January 2014

Currently discounts are available for up-front and voluntary payments made under the Higher Education Loan Program. These discounts currently are:

  • 10% for students electing to pay their student contribution up-front; and
  • 5% on voluntary payments to the ATO of $500 or more.

From 1 January 2014, these discount arrangements will be removed.

Should you have any concerns as to how these changes will affect you and your situation, please feel free to get in contact with us.