Medicare Levy has been legislated to increase from 1.5% to 2% from 1 July 2014 to provide funding for Disability Care Australia. Medicare Levy is levied on a person’s taxable income and is payable by all taxpayers with the exception of few low income earners.
This measure also increases the tax rates applicable to other amounts that include the Medicare Levy. These include:
– excess non-concessional contributions tax – 46.5% to 47%
– tax on taxable component of a superannuation pension payment received by someone under age 60 ie clients on a Transition to Retirement strategy – increase of 0.5%
– tax on taxable component of a superannuation lump sum payment received by someone under age 60. Note lump sum payments within the low rate cap ($180,000 for 2013–14 FY) remain tax free and unaffected by this increase.
- withholding tax on financial investments where no Tax File Number is provided – 46.5% to 47%
- fringe benefits tax – 46.5% to 47%.
In light of this change, clients may wish to consider undertaking the following transactions/events in the current financial year before 30 June 2014 to save on Medicare Levy:
- make lump sum withdrawals from super that will exceed the low rate threshold for clients under 60 years of age (and is not turning 60 in 2014–15 because withdrawals are tax free from 60 years of age)
- receive employer termination payment that is subject to tax
- realise assets that will incur large capital gains tax liability (However, if the client has other taxable income which would result in them being in the higher marginal tax rate for 2013–14 than in 2014–15, the client may be better off realising the assets in 2014–15).
There are also few strategies clients can adopt to avoid paying Medicare Levy, including:
- Pay superannuation death benefits via the estate (pay to Legal Personal Representative of deceased) instead of directly to a non-dependant for tax purposes from the super fund. In this situation the trustee of the deceased estate will pay tax on the superannuation death benefit and is not liable to pay Medicare Levy.
- Rollover untaxed elements (up to the untaxed cap plan) from an untaxed super scheme to a taxed superannuation fund before making lump sum withdrawals. The trustee of the taxed super fund will apply 15% tax on the untaxed element and subsequent withdrawal will be tax free if the member is age 60 or over.
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