With the budget announcement of a temporary 2% budget repair levy for taxable incomes above $180,000, those who will be affected may wish to consider some planning strategies to lessen the impact.
With the Medicare levy already legislated to increase from 1.5% to 2% from 1 July 2014, the rise in levies will effectively be 2.5% for income earners above $180,000. While this may only be a small rise, it does now increase the top tax bracket to 49%, including the Medicare levy. This is high when compared to the lower individual tax rates, the company tax rate and superannuation.
While households that have high levels of mortgage debt may not be able to consider alternative strategies, given cash-flow constraints, households that are beginning to have debt levels under control and looking to build wealth have even more reason to now act.
One of the most effective ways to reduce personal taxable income is to salary sacrifice into superannuation (for self employed making personal superannuation contributions this will result in a personal tax deduction). For many the concessional contribution limits will increase from 1 July 2014. For those who are under 50 it will increase to $30,000 and for those 50 and over it will increase to $35,000. While the Superannuation Guarantee sum also increases from 9.25% to 9.5%, for many high-income earners there will be income that can be salary sacrificed into superannuation up to those concessional contribution limits.
The tax benefit of salary sacrifice super contributions is now more significant with the higher individual tax rates. For taxable income levels between $180,000 and $273,000, the tax saving will be 34%. For income levels between $273,000 and $300,000 it will be between 34% and 19% and for income levels above $300,000 the saving will be 19%.
Income protection insurance should also be considered for people who earn a salary over $180,000 as the premiums are tax deductible. This is where 75% of future employment income is paid in the event of illness or injury, usually up to age 65.
Negatively geared investments will again be considered when looking to increase tax deductions. Property has always been a favourite for many investors, given the comfort with property ownership and the ease of borrowing to purchase a property, particularly when the bank also has security of your home. However the greatest trap with negative gearing is looking at it only from a tax perspective and not as a long-term investment. If the underlying growth in a property is not sufficient to make up for the shortfall of negative income, then it is not a good investment.
Not-for-profit organisations and charities may also benefit from the increased focus on tax deductions. However very high-income earners who wish to gift large sums on an annual basis, may wish to consider establishing their own Private Ancillary Fund (PAF) or family foundation. Contributions to the foundation are tax deductible and a minimum of 5% of the asset value must then be paid to charities on an annual basis. From a zero starting point a minimum of $50,000 per annum would be needed to contribute into the PAF, in order to justify the establishment.
The correct structure for the building of investment wealth should also be considered. High-income earners with large sums of cash and fixed interest investments in their own name will end up with close to nil return after inflation and tax. Investing in lower income earning spouse’s name may be better. For larger investment sums, the use of family trusts and also non-concessional superannuation contributions will be appropriate for some.