Federal Budget 2008

Reductions in personal tax rates and other tax offsets are some of the key highlights in this year’s budget.

The new Federal government unveiled its first budget on 13th May, with planned changes announced in a number of areas. Here we will provide you a high level overview of the announcements.

Personal Income Tax

From 1 July 2008, the 30 per cent threshold will increase from $30,000 to $34,000, the 40 per cent threshold will increase from $75,000 to $80,000 and the 45 per cent threshold will increase from $150,000 to $180,000.

New personal tax rates (Australian residents)

There will be further tax cuts from 1 July 2009 and 1 July 2010.

Low income earner tax offset (LITO)

From 1 July 2008, the LITO will increase from $750 to $1,200 and there will be further increases from 1 July 2009 and 1 July 2010. However, the LITO will continue to phase out from $30,000.

As a result of this increase, in the 2008/09 financial year, an individual with no other offset entitlements will not pay tax until their income exceeds $14,000 (up from $11,000), while a child under 18 years old will be able to receive “unearned” income of $2,667 and not pay any tax.

Senior Australian Tax Offset (SATO)

From 1 July 2008, senior Australians eligible for the SATO and the LITO will not pay tax until they reach an annual income of $28,867 for singles and up to $49,360 for couples.

Expanded income definition for superannuation co-contribution and other government benefits from 1 July 2009

From 1 July 2009 the definition of income will include certain salary-sacrificed contributions to superannuation for the following Government benefits:

• Superannuation co-contribution
• Income support payments for people below Age Pension age
• Family assistance
• Child support
• Financial and retirement savings assistance delivered through the tax system.

The definition of income used for the Senior Australians Tax offset, Medicare levy surcharge and dependency tax offsets will be expanded to include net financial investment losses and net rental property losses.

The income definitions used for the Senior Australians tax offset, pensioner tax offset, and dependency tax offsets will be expanded to include reportable fringe benefits.

The Commonwealth Seniors Health Card income test will be expanded to include gross income from superannuation income streams from a taxed source as well as income that is salary sacrificed to superannuation.

For more information on superannuation co-contributions, income streams and other superannuation boosting strategies please click here.

First Home Saver Accounts

First Home Saver Accounts (FHSAs) will now commence from 1 October 2008. Eligible individuals will be able to make post-tax contributions into a FHSA, which will include the following amended features:

• A Government contribution of 17 per cent on the first $5,000 personally contributed each year (indexed).
• Personal contributions will be allowed until the balance reaches $75,000 (indexed).
• Earnings on the account will be concessionally taxed at 15 per cent.
• Tax free withdrawals from the account to purchase or build a first home in which to live can only be made after contributions of at least $1,000 have been made in at least four separate financial years.

Other taxation changes

Personal income tax

Effective from 1 July 2008, an income threshold is to be introduced of $150,000 (indexed) when seeking to claim the Dependent Spouse, Housekeeper, Child Housekeeper, Invalid Relative and Parent/Parent-in-law tax offsets.

Small business - Capital gains tax concessions

To use the under $2 million turnover test for the purposes of the small business capital gains tax (CGT) concessions the disposer of the asset must be carrying on a business.

From 1 July 2007, the ability to use the under $2m turnover test is to be extended in certain limited circumstances to where the disposer is not carrying on a business but:

• The disposer's asset is being used in a business carried on by a related entity; or
• The disposer personally owns the asset and it is being used in a business carried on by a partnership in which the disposer is a partner.

Fringe benefits tax - Exemption for eligible work-related items

The current fringe benefit tax (FBT) exemption for certain work-related items (including laptop computers, personal digital assistants and tools of trade) is to be tightened by ensuring the exemption only applies where these items are used primarily for work purposes. The FBT exemption will generally be limited to one item of each type per employee per year.

The measure will apply to items purchased after 7.30 pm on 13 May 2008.

The Government will also deny employees depreciation deductions for FBT exempt items (that is, items purchased primarily for work purposes) purchased from 7.30 pm on 13 May 2008. For items purchased before that time, employees will be denied depreciation deductions for the 2008-09 and later income years.

This measure will ensure that employees are no longer able to gain a double benefit by obtaining an FBT exempt item (such as a laptop computer) from their pre-tax income, and then claim a deduction for depreciation.

Social security

Carer Bonus

Carer Payment recipients will receive $1,000 and recipients of Carer Allowance will receive $600 for each eligible person in their care. These payments will both be exempt from income tax. Those receiving both the Carer Payment and Carer Allowance on 13 May 2008 will receive both lump sum payments.

Seniors Bonus

The Government will make a tax-exempt payment of $500 to individuals in receipt of Age Pension, Veterans' Pensions, Widow B Pension, Wife Pension, Seniors Concession Allowance, Mature Age Allowance, Widows Allowance or Partner Allowance as at 13 May 2008.

Baby Bonus

From 1 January 2009, eligibility to the Baby Bonus will be limited to families with an adjusted taxable income of $75,000 or less in the six months after the birth of a baby (equivalent to an annual income of $150,000).

The Baby Bonus will also be paid in 13 fortnightly instalments from the date of claim, rather than as a lump sum, for all eligible births from 1 January 2009.

The Government will increase the Baby Bonus from $4,258 to $5,000 on 1 July 2008 and will index the payments by the Consumer Price Index each subsequent year on 1 July.

In addition, the Baby Bonus will be extended to families with newly adopted children aged from two years to 16 years, from 1 January 2009.

$150,000 income test on primary earner for FTB-B

Eligibility for Family Tax Benefit Part B will be limited to families where the primary earner has an adjusted taxable income of $150,000 a year or less.

Utilities Allowance

The Government will extend the Utilities Allowance to recipients of Disability Support Pension, Carer Payment, Invalidity Service Pension, Partner Service Pension, Income Support Supplement, Bereavement Allowance, Widow B Pension and Wife Pension irrespective of age.

From March 2008, the Utilities Allowance annual rate increased from $107.20 to $500 for singles (or couples combined). It will be paid quarterly with payments in March, June, September and December.

Education support

Education Tax Refund - Refundable tax offset

The Government will introduce a 50 per cent Education Tax Refund on eligible educational expenses from 1 July 2008.

Eligible families can claim up to $750 for each child undertaking primary school studies (that is, a refund of up to $375 per child, per year) and $1,500 for each child undertaking secondary school studies (that is, a refund of up to $750 per child, per year). These amounts will be indexed annually from 1 July 2009.

Increase in Child Care Tax Rebate from 30 per cent to 50 per cent

The Child Care Tax Rebate will increase from 30 per cent to 50 per cent. As part of this measure the maximum out-of-pocket expenses claimable will increase from $4,354 to $7,500 per child, per year. From 1 July 2008, the Child Care Tax Rebate will be paid quarterly, instead of annually.

Important note

The information in this article does not take into account your objectives, financial situation or needs. Therefore, before acting on the information, you should consider its appropriateness to your personal circumstances. Although this information was obtained from sources considered to be reliable, it is not guaranteed to be accurate or complete. This publication was prepared by AMP Financial Planning Pty Limited ABN 89 051208327. The information is current as at 15 May 2008 and may change over time.