Federal Budget 2014 – “Lifters not leaners”

An old proverb says “people unite over problems but divide over solutions”.  The weight of expectation lies heavily on Joe Hockey’s first Federal Budget to solve many many long standing fiscal problems without creating a war in the voter base over the solutions.  The budget sell is an appeal to a vision of a national ideal that Australians are “lifters not leaners”.  It is a sales pitch with modest increases in taxation and significant cost reduction measures including significant welfare reductions.  In return, the budget deficit will reduce from a projected $49.9 billion in 2014 to $29.8 billion in 2015.

Almost all the tax increase measures had been leaked prior to the budget.  Of 235 pages of budget measures, only 14 pages are devoted to revenue measures.  The headline revenue measure is the 3 year “Temporary Budget Repair Levy” of 2% which applies to income in excess of $180,000.  This increases the personal income tax rate to 49% from 1 July 2014.  To match the personal tax increase, the FBT rate increases to 49% from 1 April 2015.  Interestingly this means that there is a 2% benefit to packaging taxable fringe benefits for people on more than $180,000 between 1 July 2014 and 31 March 2015.  Will we see a salary packaging frenzy in the short term?  The same opportunity arises from 31 March 2017 to the end of the 3 year levy on 30 June 2017.  Indexation of the fuel excise is set to recommence ½ yearly by indexation to movements in customs duty rates on other fuels.  This will hit people at the bowser.

The balance of the budget is devoted to expense measures directed at cost management and reductions and which affects various forms of welfare.  In particular, the reduction in the income limit on primary earners for Family Tax Benefit B from $150,000 to $100,000 will sting the middle class from 1 July 2015 and apply only to children under 6 with a 3 year phasing out for older children.  From 1 July 2015 the Medicare rebate for a standard consultation will reduce by $5 with a doctor entitled to collect a patient contribution which would appear to create a $2 per visit windfall to doctors who choose to collect $7. Patients on concession cards and with children under 16 return to the current rebate after 10 visits each year.

Gens X, Y and late blooming boomers (born after 1 July 1958) will be hit by the increase in the qualifying age for the aged pension to age 70 by 1 July 2035. Pension income and assets threshold increases will be paused for 3 years from 1 July 2017.  The increase in the SGC rate to 12% will be slowed rising to 9.5% from 1 July 2014, remaining static to 30 June 2018 before rising over 5 years to 2023 to 12% and excess super contributions will become refundable.

Students will be affected from 1 July 2016 by a requirement to repay HELP debt at a lower starting income level set at 90% of the threshold that would currently apply, being in the order of $50,638.  However, the rate of repayment will reduce from 4% to 2% of income above the threshold.  The “cost of finance” on unpaid HELP debt will also be increased to a rate matched to the 10 year bond yield capped at 6%. Deregulation of fees for higher education will also shake up the cost of higher education.

What about small to medium enterprises? Not much.  $10,000 per employee to employ a worker over 50 who has been on benefits for 6 months.  A modest reduction in the refundable R&D tax offset of 1.5% applies from 1 July 2014 in anticipation of the drop in the company tax rate to 28.5% from 1July 2015.

All of these measures are of course subject to approval in a post 1 July hostile Senate which would appear to require cooperation with the Palmer United Party.  Early theatrics suggest that this could, at least, be entertaining.

Individuals & families

As a result of the need to improve the budgets bottom line, this years budget has focused heavily on individuals and families.

We note in particular that the changes to the family tax benefit part B will have a significant impact on many family budgets.

Deficit levy of 2% (Temporary Budget Repair Levy)

From 1 July 2014 to 30 June 2017, a temporary three-year deficit levy of 2% will be imposed on individuals with taxable income over $180,000.

A number of other tax rates that are currently based on calculations that include the top personal tax rate will also be increased accordingly (except the Fringe Benefits Tax rate) for the relevant 3 income years.  However to prevent high-income earners from utilising fringe benefits to avoid the levy, the FBT rate will be increased from 47% to 49% from 1 April 2015 until 31 March 2017 (see also companies section on FBT).

Example.  For a taxpayer with a taxable income of $200,000 per year, this results in an additional tax impost of $400 per year or $1,200 in total over three years.

 


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Are you ready for the Super Guarantee increase?

From July 1, 2013 employees will receive 9.25% compulsory superannuation and this amount will increase gradually  to 12% on July 1, 2019. This is great news for an employee’s super balance, but who will pay?  Either the employer takes the change as a direct, and potentially huge, increase in wage costs, or it convinces its employees to see the increases as part of the normal pay increases they will be expecting over the next seven or so years.In addition to increasing the level of SG contributions to 12%, the legislation also removes the age limit on SG contributions. Presently, SG is not required for an employee who is aged 70 or more.

Schedule of increases in the level of SG contributions

Year starting on    Super guarantee
1 July 2013    9.25%
1 July 2014    9.5%
1 July 2015    10%
1 July 2016    10.5%
1 July 2017    11%
1 July 2018    11.5%
1 July 2019 and after    12%

Minister for Employment and Workplace Relations Bill Shorten insists that, rather than constituting a ‘tax on business’, the super increase will be covered by ‘deferred wage increases’ worked out between employers and employees during wage negotiations.

The real challenge for HR departments, then, will be in communicating the change. Will they build the SG increase into the overall wage increase each year? This will depend on how well they can communicate to staff that super is, in fact, part and parcel of their remuneration. The challenge will be greatest in companies or industries where pay is usually expressed and perceived to be net of super.

A recent survey revealed that 95% of workers believe that job salaries should be advertised as base salary figure plus super and not as a total remuneration package. For most employees, super is seen as an “obligatory payment” from the employer rather than a legitimate component of a salary package.

This would suggest that it’s going to be an uphill battle for employers to convince workers (especially young ones) that their future wage increases will include a superannuation component, when most people only look at how much hits their bank account every pay period..

Another challenge for HR professionals is that the attitudes towards superannuation can vary greatly across industries. In the traditional white-collar industries of banking and accounting there is a better understanding of total remuneration packages as being an overall cost to the employer whereas other industries such as tourism and hospitality there is a focus on cash and super is barely on the radar.

There is no denying that the impact of these changes can be huge for businesses and yet, according to a survey by Aon Hewitt, many employers have not yet fully considered the effect it will have and have also not prepared themselves to avoid fines for non-compliance.

Aon Hewitt questioned 160 Australian companies about superannuation, which produced these interesting results:

  • 58% of employers were yet to determine their response to the SG hike
  • Of the 29 per cent of companies currently paying above the SG, only 11 per cent planned to stay the same amount ahead of the minimum when it went up, whereas 32 per cent expected to absorb the increase

Aon Hewitt senior consultant and actuary Ashley Palmer said “”Broadly speaking, those who use a remuneration packaging method may be passing the cost on to employees, while employers who use the base-plus approach will be bearing the increase themselves,”

So, what to do now?

  • If not already accounted for, the increases will need to be factored into your business’ budgets going forward.
  • Start thinking about how the increased level of SG contributions will affect remuneration packages from 1 July 2013
  • Consider any implications for employment agreements and remuneration packages, and this may require employers to review all staff contracts. Employers may need to seek legal advice in this area.
  • Ensure that their payroll systems are configured to remit the increased contributions to each employee’s superannuation fund.
  • Consider any older workers aged 70 or more, as SG contributions will need to be made for them from 1 July 2013.
  • Be mindful of the concessional cap of $25,000 which from 1 July 2012 applied to all employees.

Article by Mark Sablatnig, Manager, Prosperity Wealth Advisers Pty Ltd.  Mark provides solutions about corporate super, group insurance and employee benefits to our clients from offices in Brisbane, Sydney and Newcastle.