Guerdon Associates’ pre-budget assessment of the likely impact of the budget on remuneration practices and business (see HERE), correct as it was, needs to be enhanced with further news that makes superannuation less certain, and Australia a less attractive place, for employees, while increasing costs for employers.
Super less duper
1. The start date of the 2010-11 Budget measure which sought to increase the concessional contribution caps for individuals aged 50 and over with superannuation balances below $500,000 will be deferred by two years, from 1 July 2012 to 1 July 2014.
2. The rate of contribution tax on high-income earners (those with “incomes” of $300,000 p.a. plus) will be increased from 15% to 30% as from 1 July 2012. However, the higher tax rate will not apply to contributions that exceed the concessional contributions cap as these are already taxed at 46.5%.
If an individual’s income excluding their concessional contributions is less than the $300,000 threshold, but the inclusion of their concessional contributions pushes them over the threshold, the higher tax will only apply to the part of the contributions that is in excess of the $300,000 threshold.
There is likely to be a significant number of people who may unexpectedly become subject to this additional tax in those years where their income is higher than normal. For example, there are many cases where a person’s taxable income can vary significantly from year to year, due to:
- fluctuating bonuses
- the sale of shares or an investment property which results in a significant realised capital gain
- leaving employment resulting in the payout of accrued annual leave, long service leave and sick leave, as well as the payment of other benefits such as employment termination payments and redundancy benefits (in most cases, at least part of a redundancy payment will not be included in taxable income)
- The granting or vesting of shares under various employee share plan arrangements.
There is an additional consideration for employers with temporarily relocated foreign national employees. High-income temporary residents will become subject to an effective tax rate of 54.5% on their employer’s superannuation contributions (a combination of the current 15% contribution tax, the proposed 15% additional tax and the 35% benefit tax on what is left after contribution taxes). This, combined with the additional tax impost on LAFH allowances (see below) will further discourage prospective high value employees considering relocating to Australia.
The inequity in superannuation taxation treatment of income earners at various income levels still remains, inviting future governments to make further changes. These are described HERE.
New tax rules for employment termination payments
The employment termination payment (ETP) tax offset can currently be used to reduce tax payable on payments made on leaving employment including, amongst other payments, ‘golden handshakes’. The Government believes this offset primarily benefits high-income earners, who are more likely to receive such payments and receive much larger payments when they do. To address this, the Government will limit the availability of the ETP offset.
Currently ETPs are concessionally taxed up to a cap of $175,000 (2012/13 indexed). Up to this limit a tax rate of 15% plus the Medicare Levy applies if the recipient has attained their preservation age. At younger ages a rate of 30% plus the Medicare Levy applies. ETPs in excess of the cap are taxed at the highest marginal tax rate plus Medicare Levy. Currently an individual’s other income generally has no impact on the rate of tax.
From 1 July 2012, only that part of an affected ETP that takes a person’s total annual taxable income (including the ETP) to no more than $180,000 will receive the ETP tax offset. Amounts above this whole-of-income cap will be taxed at marginal rates. The whole-of-income cap will complement the existing ETP cap ($175,000 in 2012-13, indexed), which ensures that the tax offset only applies to amounts up to the ETP cap. The ETP tax offset ensures that ETPs up to the ETP cap are taxed at a maximum tax rate of 15 per cent for those over preservation age and 30 per cent for those under preservation age.
Existing arrangements will be retained for certain ETPs relating to genuine redundancy (including to those aged 65 and over), invalidity, compensation due to an employment-related dispute and death.
Living Away from Home Allowance
Prior to the budget, we identified the issues associated with living-away-from-home (LAFH) allowances for employers trying to attract foreign executives and other workers.
The budget included further changes that will:
- limit access to the LAFH tax concession to employees who maintain a home for their own use in Australia, that they are living away from for work; and
- restrict the tax concession to a maximum period of 12 months in respect of an individual employee for any particular work location.
Australian employees who are required to relocate within Australia for work purposes will only be eligible for the LAFH allowance on their host location residence if they maintain their place of residence in their home location (e.g. have a family living at home) and do not let or sub-let their property. Even those who do meet these criteria will only be able to receive the allowance for 12 months.
The LAFH allowance is effectively removed for international workers who are living away from their country of origin, unless they maintain a home elsewhere in Australia. This will reduce Australia’s attraction for expatriate workers compared with other expatriate locations such as Hong Kong and Singapore.
In all cases, employees will be required to substantiate their LAFH expenses. For food expenses, they may be able to rely on ATO guidelines. Allowances will be treated under the income tax system (rather than under Fringe Benefits Tax) and therefore will be included in the employee’s assessable income. Employees will be able to claim a deduction for substantiated accommodation expenses and food expenses in excess of the statutory amount.
Reimbursements for LAFH food and accommodation are treated as a benefit and will be subject to FBT unless the above concessions apply. Employers must obtain documentary evidence substantiating expenses incurred for accommodation.
Employees who already have LAFH allowance arrangements can retain these until a new arrangement is agreed, or until 1 July 2014.
Employer costs will increase for high-value relocated employees, as they will have no choice but to make up for LAFH shortfalls.
Additional uncertainty with superannuation may see employees seeking alternative, diversified forms of saving. Loan backed share plans, and salary sacrifice share plans up to the $5,000 limit will enhance a company’s ability to attract and retain staff.© Guerdon Associates 2022 Back to all articles