In what many are calling a pre-election spending spree, last night’s Federal Budget included tax cuts for individuals and businesses and a significant outlay on social services.
We do not anticipate any major effects on salary packaging arrangements, but here is a summary of some of the measures to be aware of.
While there is no change to the marginal tax rates or the thresholds above which they apply, the low and middle-income tax offsets are being extended for another year. This tax rebate or offset is applied when lodging a tax return and will impact individuals with incomes up to $126,000 pa. The maximum rebate for an individual will be $1,080.
The low-income threshold above which Medicare levy is payable is also to be increased and backdated to 1 July 2020. The savings for individuals from this measure will be much more modest, being only a few dollars annually.
Overall, these changes remind employees that when considering the tax effectiveness of salary packages, they need to consider their marginal tax rates and any offsets that may apply when lodging their tax returns.
The Child Care Subsidy (CCS) rate is to be increased by 30% for second and subsequent children aged five and under, up to a maximum of 95% (previously 85%) for these children. This measure is set to commence from July 2022. The CCS cap of $10,560 per child per year will be removed from 1 July 2022.
When child care is salary packaged, the CCS is no longer available as, technically, the employer is paying the child care fees. We strongly recommend employees consider this when comparing the full net cost of each option before determining the best one for them.
Changes to superannuation contributions required to be made by employers may have an indirect impact on salary packaging.
There were no announcements in the Budget about any changes to the planned increase in the rate of compulsory employer superannuation contributions from 9.5% to 10.0%. Therefore, the increased rate will be effective from 1 July 2021, as previously legislated. In addition, the annual cap for concessional contributions will increase from $25,000 to $27,500. For more on this, read our update here.
A change the Government did address last night was removing the monthly income threshold ($450) below which employers do not need to pay superannuation. The timing of the change is subject to the legislation passing, but it is unlikely to be before 1 July 2022.
A question that arises with both these changes is whether the employer bears the cost of additional superannuation or whether this enforced saving is deducted from the employee’s salary. The answer will depend on the specific contract or industrial instrument applicable to the employee.
Currently, when deducting self-education costs, the first $250 is not deductible. But following the Government’s announcement last night, this deduction exclusion will be removed, effective from the 1 July following enactment of the legislation – so 1 July 2021 at the earliest, but more likely 1 July 2022. However, this does not change salary packaging arrangements, as the $250 exclusion does not apply when salary packaging.