New tax rules kick in
WELCOME to a new financial year
Today coincides with huge changes to the tax scales and to superannuation, which makes it imperative that you look at your financial affairs to ensure you are in good shape for the future.
For years marginal tax rates have been dropping. Today that trend is being reversed and marginal rates are increasing for low-income earners.
The increases in marginal rates are accompanied by an increase in the tax-free threshold, which gives an effective tax cut of about $6 a week for people earning less than $80,000.
There is no tax cut for those earning more than $80,000 once income reaches $80,000 a year, the marginal rates and tax thresholds are unchanged.
Last financial year the first $6000 was tax-free and the next $31,000 was taxed at 15 per cent. Now the first $18,200 is tax-free and the application of the low-income tax offset (LITO) means no tax will be payable if income is less than $20,542.
It's a welcome initiative because more than one million Australians will be freed from the burden of filing tax returns. However, it means a radical rethink for those who are trying to save for their retirement.
No longer will it be appropriate for low-income earners to simply invest after-tax dollars in superannuation, where the earnings will be taxed at 15 per cent, when they can hold their funds outside the system and pay zero tax if total income, including investment earnings, is less than $20,542 a year. [or those over 55 - 60 to convert their super fund to the nil tax pension phase].
However, lower-income earners who are eligible (you need income from employment or business) should continue to make a non-deductible contribution to super to receive the government co-contribution.
For this year, the maximum co-contribution has been slashed to $500, but is still worth making the contribution of $1000 to qualify it's a risk-free 50 per cent return on your money.
For incomes between $37,000 and $80,000, the marginal rate is increasing from 30 per cent to 33 per cent, and LITO has been tweaked so it reduces at 1.5c for every dollar of taxable income over $37,000. This makes the effective rate 34.5 per cent on incomes from $37,000 a year to $80,000 a year.
Deductible contributions will still be attractive for people in this tax bracket because such contributions lose just 15 per cent, whereas money taken in hand would lose 34.5 per cent.
The amount that can be contributed to super as a concessional contribution is now $25,000 a year for everybody who is eligible this includes contributions from all sources.
So speak to your employer about your current salary-sacrifice arrangements so you do not find yourself in excess-benefits territory with all the associated penalties.
This is particularly relevant for all those 55 and over who are drawing a transition-to-retirement pension. As this involves salary sacrificing to the maximum, they may well find they will need a radical change to their arrangements.
Email Steve Blizard [ steve@blizard.com.au ] to review your portfolio.
Article by Noel Whittaker Sunday Times 1 July 2012