In a move to rein in about $5 billion a year in health insurance rebates, means testing will apply from 1 July this year, saving the government about $2.4 billion over the next three years.

Australians who earn more than $84,000 (single) or $168,000 (couple/ family) in the next financial year will pay much more for hospital and extras insurance, as their rebate will be reduced from 1 July. 

At the same time, the Medicare Levy Surcharge (MLS) will be increased for higher income earners who don’t have hospital insurance – an additional tax of up to 1.5% of your income will apply.

Private cover primer

Our calculations found that most high income earners are still likely to save if they pay for private hospital cover rather than dropping it and paying the extra MLS instead. The more you earn, the more you can save.

You can prepay your annual premium before the end of June 2012 to cover the next 12 months, and any rebate reductions will only apply to premiums you pay after 1 July 2012.

Three regulations affect how much health insurance costs you:

• Private Health Insurance Rebate  
• Medicare Levy Surcharge (MLS)
• Lifetime Health Cover (LHC)

 

The Private Health Insurance Rebate applies to extras and hospital insurance, so your premium will go up for both if your rebate is reduced. However, MLS and LHC depend on whether you have hospital insurance.

So if you drop your extras insurance, there won’t be a tax penalty or surcharge. But you’ll have to wait if you take up extras again later, as waiting periods of two to 12 months usually apply for most therapies (three years for hearing aids).

Extras health insurance

While extras cover attracts the Private Health Insurance Rebate, some consumers are finding they’re not getting value for money. Check how much you’ve received in extras claims over the past year against what your new premium will be after means testing kicks in from 1 July.

If the benefit is substantially smaller than the premium you pay, consider dropping it. One consumer, Jennifer, was on the money when she told us: “As an infrequent user of extras, I’d probably be ahead if I didn’t have extras cover and simply paid for the total amount of any claim.”

Notes All figures including ages are valid from 1 July 2012. Income levels are for the financial year 2012-13. To calculate your savings we used 2011 CHOICE Best Buy policies with an excess of up to $500 (single) and $1000 (family/couple) for basic and full hospital cover. We added the average increase (5.06%) that came into effect on 1 April. We then reduced the premium by the rebate applicable for each income level and compared the amount against the MLS payable for each income/age group. The graphic shows average results only, and you need to consider your personal circumstances. Health insurance premiums vary depending on the insurance company, cover level and where you live. MLS is a percentage of your income, so if your income is just above the cut-off and/or you use a more expensive hospital policy, you may pay more for it than if you paid the MLS instead.

1 Percentage based on your annual household income.

2 Consider your age and health issues when taking only basic health cover.

Jargon buster

Private Health Insurance Rebate paid by the government on your hospital and extras cover premiums will be means tested from 1 July.

Lifetime Health Cover (LHC) is a surcharge that adds 2% to your premium for every year you don’t have hospital insurance after age 31. It can add up to 70% and applies for the first 10 years of your hospital cover, but doesn’t apply if you were born on or before 1 July 1934. Once you take out hospital insurance you can drop it for up to 1094 days without penalty.

Basic hospital cover limits and excludes all, or a range, of services such as heart or eye surgery, IVF, obstetrics and hip/knee replacements. You usually can’t jump public hospital waiting lists and may be treated the same as someone without private hospital insurance, so it may not be suitable for your needs. However, it will help you avoid MLS and LHC surcharges.

Full hospital cover includes all services in a private or public hospital, and allows you to jump waiting lists.

Medicare Levy is a 1.5% tax paid by everyone, regardless of whether they have private health insurance (unless they’re able to qualify for an exemption or reduction).

Medicare Levy Surcharge (MLS) is an extra tax for high-income earners on top of the Medicare Levy that you can avoid by taking out hospital cover. You can choose cover with an annual excess of up to $500 (single) or $1000 (family). It was 1% for everyone above the cut-off, but from 1 July a stepped rate of 1-1.5% will apply.

Source: www.choice.com.au  |  Author: Uta Mihm

Note: Dobbrick Financial Services does not provide advice on the most appropriate health insurance for your needs. We included this article to demonstrate a general financial planning strategy.

The information contained on this web site is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from a financial adviser.

Taxation, legal and other matters referred to on this website are of a general nature only and are based on Dobbrick Financial Services’s interpretation of laws existing at the time and should not be relied upon in place of appropriate professional advice. Those laws may change from time to time.

 

The surplus that Australia had to have

The 2012-13 Federal Budget contains a raft of measures designed to “spread the benefits of the mining boom” and generate an estimated surplus of $1.5 billion in the next financial year. Measures target corporate Australia and high income earners.

The increase in the superannuation guarantee contribution rate to 12% finally appears locked in.  However, other changes to superannuation contributions and managed investment trusts are disappointing as they reinforce a growing sense of legislative uncertainty among investors.

 

Superannuation

Return of the ‘super surcharge’ for high income earners

A tax increase will be imposed on high income superannuation members from 1 July 2012.  This will take the form of a doubling of the superannuation contributions tax, from the current 15% to 30%, for contributions in respect of a member earning more than $300,000 in income a year.  The Government explicitly confirmed no changes to the 15% tax on investment earnings, nor to the tax exemption for earnings on assets supporting pensions.

The underlying rationale is that contributions to superannuation, even taxed at 30%, will remain an attractive option to these high income members given their marginal tax rate outside of superannuation of 45% (plus Medicare levy).

Industry has reason to be very concerned with this announcement: by linking the rate of superannuation contributions tax to the level of the member’s taxable income (information not known by the superannuation fund), this measure could be similar to the ill-fated ‘super surcharge’ which was introduced in 1996 and abolished in 2005 because the revenue it generated hardly covered the huge costs of administering and collecting the surcharge tax.  Russell expects there to be serious and vigorous consultation between industry and Government going forward to address concerns that this new tax will impose a similarly unjustifiable burden on funds.  The Government’s position is perplexing, given that it is simultaneously promoting Stronger Super reforms to encourage scale, rationalisation and higher standards of efficiency within superannuation funds to achieve cost savings for superannuation members.    

Deferral of higher contribution caps for over 50s

The general concessional contribution cap of $25,000 will apply to all individuals, regardless of age, from 1 July 2012 to 30 June 2014. Unsurprisingly, the concessional contribution cap of $50,000 due to apply to individuals over 50 with a superannuation balance of less than $500,000 from 1 July 2012, has been deferred until 1 July 2014. This will provide further time for the superannuation industry to implement the changes necessary to administer the higher cap.

Other tax changes impacting super funds

CGT rollover relief

After a lengthy lobbying effort, superannuation funds will be pleased to see a re-confirmation in the Budget papers that the Government will re-introduce the CGT rollover tax relief for merging superannuation funds. 

Draft legislation re-introducing the CGT tax rollover relief is expected to be released in the second half of this calendar year. The new legislation will apply from 1 June 2012 to 1 July 2017 and will be based on the previous CGT rollover tax relief that expired in September 2011.

The Federal Opposition announced last week that they would not oppose this measure. 

Scrapping of the proposed 1% company tax reduction

Given the significant allocation to Australian equities held by most superannuation funds, funds will be interested in the market reaction to the Government’s abandonment of the proposed phased 1% reduction of the company tax rate.  The announcement is not altogether surprising as the Federal Opposition had signaled that it would not support the company tax reduction. 

The Government notes that instead of the 1% tax reduction for companies, companies will benefit from the new loss carry-back rules and, additionally, small businesses will benefit from an instant asset write-off from 1 July 2012.

SuperStream – temporary levy on APRA regulated super funds

A temporary SuperStream levy will be imposed on APRA-regulated superannuation funds to meet the regulatory costs of implementing the Government’s SuperStream reforms. The levy will be collected by APRA within its existing supervisory levy process and is expected to raise $467.1 million over seven years, commencing 1 July 2012. The additional funding raised will go towards investment in key systems such as the ATO’s information technology.

No further details are available on how the levy will be apportioned between the superannuation funds.

 

Investment and advice

Managed investment trusts – increase in final withholding tax rate

The Government has announced that the managed investment trust (MIT) withholding tax rate will double from 7.5% to 15% from 1 July 2013.

In 2008, the Government announced the long-awaited measure to reduce Australia’s MIT withholding tax rate from 30% to 7.5% (phased in over three years) so as to make Australian MITs more competitive with those of other countries in the region.

The doubling of the Australian MIT withholding tax rate represents a significant, and somewhat unexpected, new headwind for Australian MIT operators trying to attract foreign investors.  Russell’s view is that this is inconsistent with the Government’s new “Investment Manager Regime” initiative (also announced in the Budget), which is designed to attract foreign investment into Australian managed investment products and services. 

No 50% discount for interest income

The Government will not proceed with the 2010-11 Budget measure of a 50% discount for interest income, which was due to commence on 1 July 2013. This reflects concerns with the complexity in calculating the discount for interest income and its overall effectiveness.

Eligible Termination Payment tax offset changes

From 1 July 2012, the availability of the Eligible Termination Payment (ETP) tax offset will be limited. Any part of an ETP (such as a golden handshake) that takes a person’s total annual taxable income (including the ETP) to more than $180,000 will not be eligible for the ETP tax offset. Amounts above this whole-of-income cap will be taxed at marginal rates.

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.

 

Other measures

Tax loss carry-back rules

As recommended by the Independent Business Tax Working Group following the Government’s 2011 Tax Forum, the Government will be introducing tax loss carry-back rules from 1 July 2012.  This is a small but useful step in addressing the asymmetry between the tax treatment of income and gains (taxable in the year derived or received) and net losses which can’t be deducted in the year incurred but are instead carried forward by companies for recoupment in future years.

The tax loss carry-back rules will initially allow companies that make a loss to claim a tax refund of up to $300,000 of tax paid on income and gains in the previous year.  This will then be extended to allow companies to claim back tax paid in the previous two years (suggesting a maximum of $600,000 that could be claimed back in the loss year based on the current 30% company tax rate).

The Budget announcement indicates that this change will only be made for companies that incur tax losses as well as entities taxed like companies (e.g trading trusts).  Russell’s view is that the carry back facility would be useful for superannuation funds, investment trusts and other non-corporate investing entities, the tax positions of which can fluctuate from year to year because they are largely correlated with market conditions.

This Budget announcement represents the first of a number of business tax recommendations to be delivered to the Government by the Business Tax Working Group by the end of this calendar year.

Scrapped – Tax Breaks for Green Buildings program

The Government announced that it will not proceed with the ‘Tax Breaks for Green Buildings’ program, which was announced as part of the Government’s 2010 election campaign. It was originally due to start on 1 July 2011 but was then deferred to start on 1 July 2012. Under the program, businesses that undertook capital works to improve the energy efficiency of their existing buildings – from 2 stars or lower to 4 stars or higher – would have been able to apply for a one-off bonus tax deduction of 50% of the cost of the eligible assets or capital works.

Institutional investors with direct property portfolios may need to assess the impact of this announcement on any ‘green’ initiatives which were to be funded using the benefit of this tax concession.

Source: Russell Investments

Photo: Courier Mail

With more details to be released later today, it is expected the new reforms will allow for many people to be cared for in their homes.

Penny Wong, Minister for Finance and Deregulation, told ABC Radio the Government spends about $12bn on aged care with around three million Australians aged over 65 years today and estimates this number will reach 8.1 million by 2050.

“But, as many families know, the needs of older Australians outstrip the capacity of the current system,” said Minister Wong.

“Without reform, this dilemma will worsen as the population ages.”

From the wealth management perspective, this switch to a user pays model further highlights the need for aged care to be factored into retirement planning.

“Retirement plans therefore need to both provide income for the type of active retirement sought, as well as the potential need for a capital sum if aged care accommodation is needed in later years,” said Philip Galagher, head of wealth management at wealth provider Equity Trustees.

Concerns over the ability of the aged care system to cope with increasing demands could mean changes to financial arrangements underpinning aged care, said Galagher.

Advisers can expect to see more aged care requests from clients with the National Aged Care Alliance supporting the move towards a ‘user-pays’ model.

“The taxpayer cannot fund it all – particularly in years ahead with fewer taxpayers, more people needing aged care, and increased health and age pension costs as the population ages,” said Martin Laverty, Catholic Health Australia.

Friday, 20 April 2012 12:05pm

By Elise Burgess   http://www.financialstandard.com.au/news/view/12843964/