With the introduction of the Temporary Budget Repair Levy, the top marginal rate for individual tax payers has increased by 2% to 47% (or 49% including Medicare levy) for 3 years commencing 1st July 2014. The increased top marginal tax rate will apply to taxable income earned in excess of $180 000 per annum.
It is also important to note that while the Temporary Budget Repair Levy applies to high income earners, it can also potentially apply to people with incomes below $180 000 where they; sell an asset and realise capital gains, or take a superannuation lump sum benefit consisting of a taxable component between the age of 55-59, as this amount will be included in the taxpayers taxable income and could push the taxpayer over the $180 000 threshold.
As the Temporary Budget Repair Levy applies to taxable income, strategies which reduce taxable income will result in a reduction of the amount of levy payable. This can be achieved either by reducing assessable income or increasing deductible expenditure.
One means of reducing assessable income is to salary sacrifice. This will provide greater tax savings for clients with earnings in excess of $180 000 per annum. Sacrificing to benefits that attach Fringe Benefits Tax will not relieve the situation as the Fringe Benefits Tax has been increased by 2% also, and is being applied for the same period as the Repair Levy. Salary sacrifice to superannuation does not attract Fringe Benefit Tax, and is one strategy that could be utilised. Any sacrifice to superannuation must come within the superannuation caps that apply. You must make sure that the compulsory Superannuation Guarantee (which will rise to 9.5% from the 1st July 2014) is included within this figure. The caps will apply from the 1st July 2014 – the general concessional contribution cap commencing on the 1st July 2014 will be $30 000. If you are aged 49 and over on the 30th June 2014, this will increase to $35 000.
A means of increasing deductible expenditure - but at the same time providing surety that your income in the event of disablement is maintained - is to consider income protection insurance for your personal income, and business expenses insurances for your business income. Each of these look to replace income lost as a result of being unable to work due to accident or illness. The premiums are also a tax deduction, maximising your personal protection plan in a cost effective way.
Cotter Financial Services
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