The Temporary Budget Repair Levy, or the 2% Debt Levy, is now law after first announced in the 2014-2015 Budget.
The levy will apply for 3 years from 1st July 2014, for the 2015, 2016 and 2017 tax years, and it applies to all individuals with a taxable income over $180,000. The levy will be 2% of any amount above $180,000. For example, someone with a taxable income of $300,000 for the 2015 tax year will pay a levy of $2,400 ($300,000 – $180,000 x 2%).
Several other items in the tax system that depend on the top personal tax rate will also be amended to close any obvious tax loopholes. If you’re a tax payer affected by the new levy, you can still plan ahead to minimise the tax you have to pay.
1. Salary packaging
The fringe benefit tax (FBT) rate will increase to 49% from 47%. This starts from 1st April 2015 so there will be no advantage in salary packaging fringe benefits (other than those with specific concessions in the FBT legislation). However, there is a nine-month window of opportunity from 1st July 2014 to 31st March 2015 before the FBT rate increases, and some short-term salary packaging may be worth considering.
Matthew is an executive on a gross package of $400,000 who chooses to salary package private expenditure (e.g. mortgage payments, private school fees, credit card bills, etc.) totalling $100,000 during this nine-month period. Allowing for the FBT payable on the benefits, Matthew will have a net cash saving of $3,773 compared to paying expenses from after-tax salary.
2. Maximise super contributions
There will now be a greater incentive to maximise deductible/concessional superannuation contributions after 1st July 2014. The concessional superannuation caps for the 2014-2015 year based on a person’s age have changed as follows:
- age 50 and over on 30 June 2015: $35,000 contribution cap
- age 49 and under on 30 June 2015: $30,000 contribution cap
Note that employer super guarantee contributions and salary sacrifice contributions are included in these caps.
3. Rethink your investment strategy
Another popular and effective strategy is to use negative gearing for your property and share investments.
4. Income from private companies and family trusts
It is likely that there will be an increased focus on an individual’s income from private companies and family trusts during the next three years, especially with the company tax rate reduced to 28.5% from 1st July 2015. Common strategies may include retaining profits in a private company, and delaying paying dividends to individuals until after the debt levy has lapsed.
In cases where it is not possible or desirable to retain the cash in a private company or family trust, there is likely to be a resurgence of ‘loans to individuals’ from these entities under the Division 7A provisions of the Tax Act.
In these situations, it is important to carefully evaluate any likely tax savings and benefits of spreading out the loan repayment over a number of years against the cost of having to pay interest on the loan, which is not tax deductible.
In summary, those affected by the debt levy may be able to do some planning to minimise its effect, especially in the short term, but ultimately the potential savings will be relatively small for most people. It is likely that the levy will be reasonably successful in achieving its objective of collecting additional revenue.
With the debt levy pushing the top marginal rate to 47%, businesses need to ensure that they have upgraded their MYOB payroll software to ensure that withholding tax is calculated and deducted correctly for their staff.
The information provided here is of a general nature for Australians and should not be your only source of information. Please consult an experienced and registered tax agent for your tax planning.