Tax planning in the light of the Temporary Budget Repair Levy
As part of the 2014-15 Federal budget the Government announced that it will impose a Temporary Budget Repair levy of 2% on that part of a person’s taxable income which exceeds $180,000. The legislation for this has passed Parliament and the levy now applies to the 2014-15, 2015-16 and 2016-17 financial years.
The Temporary Budget Repair Levy (“TBRL”) is an additional 2% tax on every dollar of taxable income in excess of $180,000 for the period of the TBRL years (i.e. from 1 July 2014 to 30 June 2017). Moreover, it is applicable to both residents and non-residents. Taking into account the increased Medicare levy (from 1 July 2014 it rose to 2% of taxable income), high income earners will now have to pay 49% of tax on their taxable income. The tax rate could be as high as 50.5% if a Medicare Levy Surcharge is applicable.
While the TBRL is payable by taxpayers with the taxable income in excess of $180,000, it could apply in relation to some employment termination payment, other lump sum received on termination of employment, and certain superannuation lump sum payments. For example, employment termination payments that are over the relevant threshold are taxed at the top marginal rate.
Investment income (interest or dividends) or distributions from family discretionary trusts to minors are also subject to TBRL. Moreover, the additional TBRL of 2% applies on the amount in excess of the tax-free threshold of $416.
Similar, the TBRL affected the tax rate payable by a trustee. Where the trustee is assessed in relation to undistributed income of the trust the tax rate has increased to 47% of the taxable income over $180,000.
From 1 April 2015 the FBT rate will also be increasing from 47% to 49% to prevent high income earners using the FBT provisions as a loophole in avoiding the TBRL. However, the delay in changes to the FBT rates provides an opportunity for tax planning.