Can you plan around the 2% debt tax?

Written on the 21 June 2014

The introduction of the debt tax, or the Temporary Budget Repair Levy as it is formally known, may be the only certainty in the Government’s first Federal Budget delivered on 13 May.

The rest – co-payments for doctors visits, deregulated university fees, cuts to family benefits, tightening of access to disability pensions, increasing the pension age to 70 etc., - are unlikely to see the light of day in their current form. 

For those likely to be affected by the debt tax, the most common questions asked are; will the debt tax become law and, will I have to pay it?  The answer is probably yes, and it depends.

The Labor Party has stated it will not stand in the way of the debt tax but the Greens have come out in opposition to the tax and instead want more permanent reform “By shaving the top off the multi-billion dollar profits of big mining and banking corporations.” However, with Labor’s support for the tax, the legislation has a majority in both the House of Representatives and the Senate regardless of the position of the Greens.

What is the tax and who will pay it?

The debt tax will apply from 1 July 2014 until 30 June 2017.   The tax is payable at a rate of 2% on every dollar of a taxpayer’s annual taxable income over $180,000.  In effect, the top marginal tax rate will become 49%.

Be aware that if you have a one-off spike in income after 1 July 2014, for example from the proceeds of a sale of business, the debt tax is likely to impact on this one-off increase in personal income.

Individuals with a taxable income of $180,000 or less will not pay the levy except where their income (or part thereof) is subject to some other tax rate based on the top personal marginal tax rate. For example, the debt levy will apply to the unearned income of minors once income is above $416. This is generally where income is distributed to a minor through a family trust.  This is the Government’s way of ensuring people cannot avoid the debt tax by simply distributing more income to their kids through a family trust.

The debt tax will also apply to non-resident taxpayers, for example where a non-resident is a beneficiary of an Australian trust. 

In conjunction with the debt tax, the Fringe Benefits Tax rate will increase to 49% to prevent anyone using the FBT system to avoid paying the tax.  The FBT rate will increase from 47% to 49% from 1 April 2015 until 31 March 2017.

For employees of charities, not-for-profits and certain other entities, the exemption threshold from FBT will increase to ensure that the total value of cash benefits received by these employees are not affected.

Can you plan around the debt tax?

Yes, you can.  The difference in timing between the introduction of the debt tax on 1 July 2014, and the increase to the FBT rate on 1 April 2015, means that you have 9 months to utilise an effective salary sacrifice agreement and bring your taxable income below the $180,000 threshold for the year ending 30 June 2015.  Plus, you have another opportunity to reduce your taxable income when the FBT rate is reduced from 1 April 2017 until the debt tax is removed on 30 June 2017.  In effect, it is possible in some circumstances to utilise effective salary sacrifice agreements to reduce your taxable income below the debt tax threshold level for the 2015 and 2017 income years. 

Just be aware that there are certain rules that must be followed for a salary sacrifice agreement to be effective.  No doubt this will be an area that the Australian Taxation Office (ATO) will be looking at very closely in future years.

Talk to us today about the tax planning opportunities available to you.