High and middle income earners have plenty of good reason to be anxious about next week’s federal budget, with the Government searching for ways to limit a deficit that will almost certainly top $60 billion.
Treasurer Wayne Swan warned last week that the wealthy may be the prime target for cost-cutting, as the Government scrambles for ways to fund its $30-per-week pension increase.
He said that the Government will be making “hard choices” in the budget, and that “longer term, you have to look at what can be afforded by way of additional support from those who are better off”.
While the exact details of the budget remain a secret, here are some of the ways your wealth may be hit next Tuesday night.
Superannuation
Most superannuation analysts agree that the budget will be targeting their sector in a big way.
The chair of the Financial Planning Association South Australia chapter, Kerrin Falconer, says that it may be likely the Government will now put a cap on the amount a person can withdraw from their superannuation fund without paying tax.
Pauline Vamos, chief executive of the Association of Superannuation Funds of Australia, says that tax-free withdrawals were brought in as a short-term solution, but it may not affect too many individuals.
“This year in particular the ability for people to contribute extra amounts, particularly middle to high income earners, would be reduced,” she says.
“They’ve lost their jobs in the financial services industry, a lot of people are putting money aside and paying off debt – the question is whether they would have put money into super in the first place.”
Perhaps the biggest change rumoured to affect the wealthy will be in the ability to salary sacrifice into super accounts. The current maximum amount that can be sacrificed is $100,000 for people over the age of 50, and $50,000 for under-50s, but there are rumours that these figures could be halved.
This will also affect the tax rate at which the wealthy are charged when making super contributions, moving up to 46.5% from the concessional rate of 15%. The measure will mostly affect individuals with incomes of about $220,000.
Another potential change will affect people transitioning to retirement. Transition-to-retirement measures were traditionally designed to help workers who cut back to three or four days a week to maintain their cashflow by drawing a pension on the super funds. But because the strategy involves salary sacrificing, it costs the Government tax revenue and could be on the chopping blocks.
Welfare
The Government has guaranteed it will go ahead with tax cuts for high income earners, but so-called “middle class welfare” is almost certain to be scaled back or even in some cases eliminated.
Prime Minister Kevin Rudd said last month that means-testing – used last year to reduce the number of people eligible for the baby bonus and tighten Family Tax Benefit payments for those earning over $150,000 – could be extended to other areas.
Other changes that may occur include scrapping of the private health insurance rebate for high income earners and changes to parental assistance programs.
Holiday homes
Holiday homes and hobby farms may be a key target in the budget, with a loophole allowing property owners to claim tax deductions in the firing line.
Holiday home owners who rent out their property infrequently – for only a few weeks of the year – and use the home throughout the rest of the year can currently claim a $30,000 tax deduction.
These owners may soon be able to only claim a $2000 deduction. But Hayes Knight senior partner Greg Hayes says this may force owners to give up their properties and flood the market.
“The question that remains is what approach the Government will take,” Hayes says. “Will they introduce new legislation or instruct the tax office to interpret existing legislation differently?”
Rumour has it this measure alone could save $700 million over four years, with Hayes saying it would be easy to implement as the data already exists in tax returns.
Patrick Stafford is a freelance journalist and a former deputy editor of SmartCompany.
