More changes for super, same-sex couples and seniors

With Federal Parliament on its winter break, now is a good time to briefly take stock of some of the more relevant legislative developments that have occurred recently.

It’s especially timely, given the start of the new financial year, as many of the rule changes took effect from July 1, 2009.

From July 1, 2008, employers have been required to use ordinary times earnings (OTE) to work out their employees’ minimum Superannuation Guarantee (SG) contributions. Previously, SG requirements were based on a ‘notional earnings base’ definition.

Due to a number of changes over the years, previous rulings issued by the Australian Taxation Office (ATO) defining what was to be included in OTE and salary or wages have been replaced by this new SG ruling.

The ATO has altered its interpretation in some areas and a number of employee payments that would not have previously come within the OTE definition now do so.

For example, payments in lieu of notice will now form part of OTE and will attract SG contributions.

Effective July 1, 2009, the SG regulations were also amended to clarify that employers are not required to provide SG contributions in respect of paid parental leave. Ancillary leave payments, made by an employee’s usual employer while the employee is absent performing services with the Defence Force Reserves and other eligible community service activity such as jury service, are also excluded from SG.

The ATO recently released a draft ruling, which sets out its views on the meaning of superannuation contributions, for public comment.

Broadly, the ATO considers that an amount will be a superannuation contribution if it increases the capital of a super fund. However, this does not include an amount received as income, profit or gain from the investment, or realisation of an investment, of the fund’s already existing capital.

Also excluded is the receipt of insurance claim proceeds by the fund.

Various social security changes will commence on September 20, 2009, as a result of the Government’s Secure and Sustainable Pension Reform Package announced in the 2009 Federal Budget. These changes include:

• increased pension rates;
• new indexation and benchmarking arrangements for pensions;
• a new pension supplement;
• an increase in income test taper rate;
• closure of the Pension Bonus Scheme;
• the introduction of a new work bonus; and
• changes to residential aged care fees as a result of pension increases.

In 2008, the Senate Standing Committee on Community Affairs released a report on Special Disability Trusts. In the report were various recommendations to improve the use of these trusts. In May 2009, the Government responded to this report and outlined its recommendations. Broadly, the Government will give further consideration to:

• amending the eligibility criteria to make it easier for people with intellectual disability and/or mental illness to establish an SDT;
• increasing the concessional asset limit (currently $532,000);
• extending the main residence exemption to the beneficiary’s principle home held within an SDT*;
• taxing unexpended income of the trust at the beneficiary’s MTR rather than 46.5 per cent*; and
• extending the list of uses that trust income can be applied to.

* Note: these recommendations were formally announced in the 2009 Federal Budget. However, at the time of writing, legislation to implement them has not yet been introduced to Parliament.

There are several changes to the small business CGT concessions that will generally improve access to these concessions.

In brief, the proposed changes include:

• greater ability to access the turnover test (as an alternative to the net asset value test);
• a change to the definition of ‘affiliate’, to broaden the circumstances that may automatically include a spouse and child;
• various improvements with regard to eligibility for the retirement exemption; and
• increased access for surviving joint tenants, and trustees of testamentary trusts, who dispose of active assets within two years of the deceased’s date of death.

The Superannuation Legislation. Superannuation Industry (Supervision) Act 1993 defines an in-house asset as “an asset of the fund that is a loan to, or an investment in, a related party of the fund, an investment in a related trust of the fund, or an asset of the fund subject to a lease or lease arrangement between a trustee of the fund and a related party of the fund”.

This SMSF ruling provides an in-depth analysis of the ATO’s interpretation of the various terms that make up the definition of an in-house asset.

This ATO Taxpayer Alert warns against arrangements involving the non-commercial use of negotiable instruments, including cheques and promissory notes, by SMSF trustees and members when paying a benefit from, or making a contribution to, the fund.

The May 2009 Federal Budget contained changes to the income tax concessions available to participants in employee share schemes. These changes were to have immediate effect but the Government subsequently indicated that further consultation was required and any final changes would apply from July 1, 2009.

Final details of the proposed new rules were subsequently released and include setting the income tax threshold for eligibility for the upfront $1,000 tax concession to $180,000 per annum.

Legislation is now in place halving the concessional contribution caps, and temporarily reducing the Government’s co-contribution benefit.

An expanded income definition applies for:

• the under 10 per cent rule for super contribution deductibility;
• the co-contributions eligibility thresholds; and
• the spouse super contribution offset.

The 50 per cent reduction in minimum income requirements for account-based super pensions has also been extended to apply for the 2009-10 year.

A member of a same-sex couple will be able to make a spouse contribution from July 1, 2009, on behalf of their partner and claim the spouse contributions tax offset where eligible.

A member of a same-sex couple can already split up to 85 per cent of their 2008-09 concessional contributions with their partner.

From July 1, 2009, two people in a same-sex relationship will now be treated as members of a couple.

Broadly, this will mean that such individuals will only be entitled to the lower partnered rate of pension/allowance and will be means tested based on their combined assets and income.

As a result, clients in a same-sex relationship should notify Centrelink of their relationship immediately if they haven’t already done so.

A person will be considered to be a partner for Centrelink and Family Assistance purposes if they and another person are living together, or usually live together, and any of the following apply:

• they are married;
• they are in a relationship registered under certain prescribed state or territory laws whether they are the opposite or the same sex; or
• they are in a de facto relationship (opposite or same sex).

During the first half of the year, there was confusion over the definition of income for CSHC purposes. This issue has now been resolved and, from July 1, 2009, the definition of adjusted taxable income (ATI) for CSHC eligibility purposes will be as follows:

Taxable income:

• taxable income; plus
• employer-provided fringe benefits;
• target foreign income;
• total net investment losses; and
• reportable superannuation contributions.

Broadly, reportable superannuation contributions include salary sacrifice contributions and personal deductible superannuation contributions.

The income definition for Family Tax Benefit has broadened and salary sacrifice contributions made by individuals under age pension age will be added back as income for the purposes of the Centrelink income test.

Indexation of lower asset test, income test and deeming thresholds

As usual, the lower asset and income test thresholds for pensions along with the deeming thresholds, will be indexed from July 1, 2009.

Information on these new thresholds can be obtained from Centrelink’s website (www.centrelink.gov.au).

Table 1 shows the income tax rates and thresholds for Australian tax residents for the 2009-10 financial year.

Table 2 shows the tax rates and thresholds for non-residents for 2009-10.

Table 3 shows tax rates for minors for 2009-10 (unearned income).

With the low income tax offset of $1,350, a child aged under 18 years will be able to receive ‘unearned’ income of $3,000 without paying tax (see below).

Various tax offsets will change from July 1, 2009.

The low income tax offset (LITO) will increase from $1,200 to $1,350.

The LITO reduces by 4 cents for every $1 of taxable income above $30,000 as outlined in table 4.

As a result, an individual with no other offset entitlements will not pay tax until their income exceeds $15,000.

From July 1, 2009, senior Australians eligible for the SATO and the LITO will not pay tax until they reach an annual income of $29,867 for singles and up to $51,360 for couples as outlined in table 5.

The SATO reduces by 12.5 cents for every $1 of ‘rebate income’ above the shade-out threshold.

Rebate income is defined as taxable income plus:

• total net investment loss;
• adjusted fringe benefits; and
• reportable superannuation contributions (RSC).

Eligibility to receive a dependant tax offset is based on the adjusted taxable income of the individual and spouse (where applicable).

Adjusted taxable income is defined as taxable income plus:

• total net investment loss;
• adjusted fringe benefits;
• reportable superannuation contributions (RSC);
• target foreign income; and
• some tax-free pensions or benefits (eg, certain Centrelink and DVA payments); less
• 100 per cent of the individual’s deductible child maintenance expenditure.

The revised personal tax rate scales will increase the amount of fully franked dividend income that can be derived without any further tax liability as outlined in table 6.

With effect from July 1, 2009, a new definition of spouse (and child) will be inserted in various tax laws.

Same-sex de facto couples and their children will accordingly be treated like married and opposite sex de facto couples and their children in various matters including for the purposes of:

• Senior Australian Tax Offset;
• Dependant Tax Offset;
• Medicare Levy assessment;
• main residence CGT exemption; and
• CGT rollover relief on relationship breakdown.

The start of a new financial year is an ideal time to review a client’s financial position. It allows time, for example, to review the structures that should be used to hold investments.

Consideration can be given not only to tax aspects, but also any asset protection and estate planning requirements often overlooked by investors when decisions are left to the end of year ‘silly season’ rush.