The new formula for income

Changes, first announced in the 2008 Federal Budget, were recently made to the definition of ‘income’ for a wide range of means tested concessions in the areas of tax, social security, superannuation and other government benefits.

The intent of the changes is to limit or remove the ability of higher income earners to reduce their assessable or taxable income, primarily through salary sacrifice superannuation or negative gearing, to be eligible for concessions that were designed to assist low income earners.

From July 1, 2009, you should consider your clients’ circumstances with these changes in mind.

The following clients may be affected by the changes:

• clients salary sacrificing to the point they become eligible to make personal deductible contributions to superannuation, either under the 10 per cent test or due to receiving no taxable salary;
• clients who receive the co-contribution by entering into salary sacrifice arrangements to reduce their taxable income to below the co-contribution thresholds;
• clients receiving the spouse contribution tax offset for spouse contributions made on behalf of spouses with income of less than $13,800 due to a salary sacrifice arrangement or a negative gearing strategy;
• clients who meet other family tax benefit eligibility criteria who make large salary sacrifice superannuation contributions and/or have large losses from gearing property, shares, managed funds or forestry schemes; and
• clients who are members of a couple where one member is age pension age and the other is under age pension age and salary sacrificing to superannuation.

It is important to note these changes do not affect a client’s ability to engage in tax planning strategies such as salary sacrifice superannuation or negative gearing.

Table 1 provides an overview of the entitlements that may be affected by the change and the amounts included as income from July 1, 2009.

The new income definition may affect the ability of some clients to claim a tax deduction for personal deductible contributions to superannuation made on or after July 1, 2009, as illustrated in the following example.

Jason, age 56, is the managing director of his family’s printing company, earning a gross salary of $55,000 per annum plus super guarantee. Currently, he is salary sacrificing $40,000 of his salary into superannuation. He does not receive any reportable fringe benefits. He is also considering selling an investment property he has owned for many years, which would result in net capital gains of $150,000. Could Jason use the proceeds of the sale of his property to make a personal deductible super contribution?

Jason’s salary sacrifice contributions will be counted as income for the purposes of the 10 per cent test for personal deductible super contributions. His total assessable income from employment would consist of $15,000 (salary) and $40,000 (RESCs), which is 31.7 per cent of his total assessable income of $165,000 and RESCs of $40,000.

As this is in excess of 10 per cent, he won’t be eligible to claim a tax deduction for his personal super contributions. Prior to July 1, 2009, Jason would have been eligible to claim a tax deduction for the contribution because his salary sacrifice contributions would not have been included in the 10 per cent test and his assessable income from employment is 9.09 per cent of his total assessable income.

The Commonwealth Seniors Health Card (CSHC) income definition has been expanded to include:

• reportable super contributions — the sum of RESCs and personal deductible contributions; and
• total net investment losses — net losses from ‘financial investments’ and property, equal to the amount of deductible expenses that exceed the gross income from the investment. ‘Financial investment’ includes shares, managed funds, managed forestry schemes, as well as a right or option over any of these, plus any other like investments.

Note that proposals to include any income or lump sum withdrawals from a taxed superannuation fund as income were not legislated.

Clients claiming or renewing a CSHC during 2009-10 must provide their Tax Notice of Assessment (TNA) for the 2008-09 financial year or, if not available, a TNA for 2007-08 with an estimate and evidence of income for 2009-10. Clients without a TNA for either financial year are required to give an estimate of their income for 2009-10 and provide supporting evidence.

One of the key social security measures announced in the 2008 Federal Budget was including salary sacrifice super amounts in the social security income test. Legislative change was not required to implement this measure as it is a policy change by the Department of Families, Housing, Community Services and Indigenous Affairs, as noted in Section 4.3.3.60 of the Guide to Social Security Law (www.facs.gov.au).

Therefore, from July 1, 2009, Centrelink clients under age pension age who have a salary sacrifice super arrangement in place will likely see a reduction or no longer be entitled to their Centrelink benefits, including Newstart Allowance, disability support pension, carer pension, age pension and the low income health care card.

Deborah Wixted is senior technical manager at Colonial First State.