What the Government giveth, the Government taketh away. Well, come on. Did you really expect those tax cuts to be delivered without any strings or clawbacks? While your take-home pay will be bolstered from July 1, the clampdown on middle-class welfare will offset the extra income for many Australians.

Last year, the Government started this process by introducing means tests on more welfare payments, such as the baby bonus, and expanding the means test on many more. This year it has gone further by proposing further means tests on benefits such as the private health insurance rebate and limiting concessionally taxed investments such as employee share plans and super.

Treasurer Wayne Swan says it's all about ensuring fiscal sustainability and making the tough decisions but for the average taxpayer it's yet another round of changes that need to be factored into the end-of-year financial planning.

The tax cuts

These are part of the ongoing tax cuts announced in the lead-up to the last election. This year's changes are relatively minor. The threshold at which the 30 per cent marginal tax rate kicks in is being lifted from $34,001 to $35,001 and the 40 per cent tax rate, which applies on incomes of $80,001 to $180,000 is being cut to 38 per cent.

IPAC Securities says this should generate an annual tax saving of $300 for someone earning $35,000 or $55,000, $150 for someone earning $80,000, $550 for someone earning $100,000 and $1550 for someone earning $150,000. Once your income hits $180,000 you'll save $2150 so the claim higher income earners are the big beneficiaries of this round of tax cuts is not unjustified.

However, lower earners won't miss out entirely. The Low Income Tax Offset is being increased from $1200 to $1350, which will lift the maximum income where you can claim a partial offset from $60,000 to $63,750 and the maximum tax-free income you can earn is from $14,000 to $15,000. That benefit will also boost the income that seniors eligible for the Senior Australians Tax Offset can earn tax-free to $29,867 for singles and $25,680 for each member of a couple. Pension income earned by over-60s is not included in your taxable income, which means people receiving a pension can earn much more tax-free.

MLC Investments says those aged 55 to 59 can also earn more before paying tax if a pension provides part or all of their income.

Even though the tax cuts are not huge, StrategySteps director, Louise Biti says it's worth deferring any income that you can until the new financial year and bringing forward any deductions.

"If you can defer paying tax that's good because you have the money longer," she says. "It's even more effective if tax rates are changing because you could be taxed on the money at a lower rate."

While it's not easy for salary earners to choose when they receive their income, she says if you are planning to leave your job or take a redundancy payment it could make sense to wait until after June 30 so that any payout is assessed next year. If you are investing in a term deposit, it may be worthwhile choosing one that pays interest quarterly or six-monthly rather than monthly.

She says prepaying deductible expenses also makes sense as it reduces your tax bill sooner and may save you from paying tax at this year's higher rates. The most commonly prepaid expenses include interest on investment loans and income protection insurance premiums, though Suncorp Wealth Management technical specialist Rachel Leong says you can claim a deduction for any prepaid business expense, so long as the prepayment is not for more than 12 months in total and the period ends in the next financial year.

Biti says you may get a discount for paying costs like insurance premiums in advance. She says prepaying interest means locking into a fixed interest rate, which may prove an added bonus if rates go up but leave you paying more if rates fall further.

Leong says individuals earning more than $34,000 could also consider deferring asset sales until the new financial year to take advantage of the deferral of tax and the fact they will be on a lower tax rate from July 1.

Superannuation

Most experts are expecting a rush of contributions to super before June 30 in anticipation of the limits for concessional contributions being cut by more than half from July 1. If the budget changes had not been announced, the current $50,000 limit for the under-50s would have been indexed to $55,000, though the transitional $100,000 limit for those aged 50 or more would remain. Instead, no indexing will apply and the limits will be slashed to $25,000 for the under-50s and $50,000 for older people. From 2012, the transitional limit for the over-50s will disappear and everyone will be limited to concessional contributions of $25,000 (indexed).

An added nasty, says IPAC Securities head of technical services, Colin Lewis, is that indexing of the new limits (like the old) will only be done in $5000 increments. But because indexation is now being applied to just $25,000, it will take much longer for those limits to rise.

He says the cap on non-concessional or after-tax contributions is also affected. Before the budget, this was scheduled to rise from $150,000 to $165,000, allowing investors to contribute up to $495,000 if they bring forward contributions for the following two years. He says some investors were holding off making these contributions until the new financial year to take advantage of the higher limit but will be unable to do so now. Under the proposed changes, the non-concessional contribution limit will be set at six times the concessional cap for the under-50s which means it will also be slower to rise.

"The [reduced] caps mean people need to start saving well before retirement," Lewis says. He says their capacity to plough money in as they near retirement will be limited.

MLC's head of technical services, Andrew Lawless, says the capacity for employees salary sacrificing to put in more before June 30 is limited, as you can only sacrifice income you have not yet earned. If you're one of the lucky few expecting a bonus, you may be able to sacrifice that amount but Lawless says the self-employed and others eligible to make deductible personal contributions are best placed to take advantage of the opportunity to get in more before the rules change.

With investment values having taken a dive, Lewis says there may be opportunities for these people to make in specie super contributions by transferring shares or managed funds held in their own name to their super fund. The tax deduction should offset any capital gains tax liability and with prices having fallen, you can transfer more of these assets across within the contribution limits.

Others may prefer to sell assets to contribute to super, again using the deduction on the contribution to offset any capital gains tax.

Lewis says employees using salary sacrifice should also review their contributions for next year. "We're seeing cases of people overcontributing," he says. "You need to monitor the level of contributions being made on your behalf."

While it's easy to keep track of your own contributions, many employees are vague about how much their employer is kicking in and both types of contributions count towards the contributions limit. Some employers, Lewis says, fund costs such as insurance and administration in addition to paying the 9 per cent compulsory super but some employees may not be aware these extra contributions count towards their limit.

Biti says problems can also arise when someone gets a pay rise or changes jobs during the year.

"One suggestion the Financial Planning Association has made is that compulsory super should be taken out of the contribution limits," she says. "It makes it very difficult for employees to plan because they can't control those super guarantee payments."

If you exceed your contribution cap, the excess will be taxed at 31.5 per cent, effectively taxing your contribution at the top marginal rate of 46.5 per cent. Lewis says some people on the top marginal tax rate may opt to exceed their caps to get more money into the concessionally taxed super system.

But others will look at using non-super strategies such as gearing or insurance bonds.

If you earn less than $60,342, Lawless says you should also consider making an after-tax super contribution of up to $1000 before June 30 to take advantage of the full super co-contribution. The Government has announced it will cut the co-contribution next year, contributing just $1 for every $1 you invest (up to a maximum $1000) rather than the current $1.50.

The reduced co-contribution will apply for the next three years, then will rise to $1.25 in 2012-13 before returning to $1.50 in 2014-15.

He says the co-contribution is also one of the Government benefits due to be hit with an expanded means test from July 1. Under the current rules, salary sacrificed super contributions are not included in your income for determining your co-contribution entitlement, allowing employees to sacrifice their salary down to levels where they get a co-contribution entitlement or increase their maximum benefit. This is the last year this opportunity will exist.

Lawless says another strategy that can be used for the last time this year is sacrificing your salary down to less than 10 per cent of your total income the level under which you qualify to claim a tax deduction on personal super contributions. He says this strategy is often used by people who have sold a large asset as they can minimise or eliminate the capital gains tax paid by making deductible super contributions. But from July 1, salary-sacrificed super contributions will be counted in the 10per cent test.

He says it is also the last year salary-sacrificed super contributions won't be included in other Government means tests, though he doubts this will make much difference to its appeal.

Pensions

September 20 is another important date for this year's financial planning. That's when the age pension will be lifted by $32.49 a week for singles and $10.14 for couples. But the offset is the taper rate the rate at which you lose your pension for each dollar you earn above the income test threshold will rise from 40 cents to 50 cents.

Existing pensioners will be "grandfathered" so they are no worse off under the new test. Biti says if you're eligible for an aged pension, you should apply before September 20 to take advantage of this provision.

The Pension Bonus Scheme, which provides a lump sum if you defer taking your age pension, will also be abolished on September 20.

The Government is proposing to replace the scheme (which was designed to encourage older Australians to keep working) with a provision that the first $500 a fortnight of employment income will not be counted towards the pension income test. Biti says if you're still working, you should register for the Pension Bonus Scheme before September 20. She says it can provide a lump sum of up to $35,000 if you qualify for a full age pension and work for five years after qualifying. She says this is more generous than the extra pension you may receive under the amended income test.

However Colonial First State's technical team points out the comparative attractiveness depends on how many years you will stay in employment and the percentage of the pension bonus you will be entitled to. For example, it says the maximum pension bonus after two years for a single person is $5570.40 whereas the age pension concession could deliver a maximum additional $6500. But after three years the maximum pension bonus would rise to $12,533.30 but the pension concession would deliver a maximum $9750 extra. If you won't be entitled to the full pension bonus, First State says the income test concession may prove more generous.

The other offset is a planned increase in the qualifying age for the pension to 67 by 2023. This will affect anyone aged 57 or less, with those under 53 now looking at not being able to get the pension until they turn 67.

Lawless says the Henry review on taxation has also recommended the superannuation preservation age (the age at which you can access your super) be lifted in line with the pension age.

But as it is already being phased up from 55 to 60 a process that won't be completed until 2024 he says any changes are likely to be a long way out and won't affect those people currently nearing retirement.

"It's too far away to make any judgements," he says. "If you can't get your super until you're older, if you wanted to retire early you would have to accumulate some savings outside super. But it may not come in."

For self-funded retirees, the Government has extended the current relief on pension drawdowns for a further year. The reduced drawdown rates mean retirees under 65 will only be required to draw down 2 per cent of their account balance instead of 4 per cent. All minimum drawdowns are halved.

Challenger head of technical services, Alex Denham, says the minimum drawdown will be lower this year, as it will be calculated as a percentage of your reduced balance.

Lawless says that retirees wanting to take advantage of this relief shouldcontact their fund as the election they may have made earlier this year may not carry on into the new financial year.

He says those who don't need the income could also elect to have their pension paid annually in arrears, which would leave their account balance intact until June 2010 hopefully giving it more time to benefit from any improvement in investment markets.

He says self-funded retirees also scored a win with the budget announcement that the Government has dropped its proposal to include tax-free super benefits in the means test for the very popular Commonwealth Seniors Health Card.

Small business

The most significant small business measure is the planned extension of the small business investment allowance. Biti says businesses with a turnover of less than $2 million can now claim a bonus tax deduction of 50 per cent (which has been increased from 30 per cent) of the cost of eligible assets including computers and business vehicles.

The assets must be purchased between December 13, 2008 and December 31, 2009 and installed by December 31, 2010.

But she says shareholders of private companies who use company assets will no longer be able to do so for free from July 1. The value of the benefit will now be treated as taxable income in the hands of the shareholder.

Tax advantaged investments

The Government is also cracking down on other concessionally taxed wealth-creation strategies. Employee share plans were one of the big hits in the budget.

However, the Government has been forced to back down on the proposed changes and will review its decision.

"Higher-income earners may have to go back to things like gearing as a way of reducing tax," Lewis says.

And if you're thinking of ploughing the money into a hobby farm or lifestyle business, think again. From July 1, if your adjusted taxable income exceeds $250,000 you will no longer be able to deduct losses from non-commercial business activities against other income.

Biti says agribusiness schemes will be less popular this year given the collapse of issuers like Timbercorp and Great Southern though that may not be a bad thing. "You saw a lot of people investing purely for the tax deduction," she says. "But the investment needs to generate a return to give back the money you spent."

Private health insurance

The planned means testing of the private health insurance rebate will not come into effect if passed by the Senate until July 1, 2010.

The Medicare surcharge for higher-income earners will also increase from this date.

In planning terms, that means you don't need to change your existing arrangements this year, though Denham says the income definition for the surcharge will be extended to include things like salary sacrificed-super contributions from July 1. This will result in some taxpayers now finding they are liable for the 1 per cent surcharge if they don't have private health insurance. (See also page 15).

Odds and sods

Other budget measures included an extension of the first-home owners grant for six months, further amendments to the small business capital gains tax concessions, the introduction of paid parental leave, carer and disability pension increasesand a pause in the indexation of family tax benefit andthe baby bonus.

CONCESSIONAL CONTRIBUTION CAP                                                           
                                2008/09                 2009/10         2009/10         
                                                Before budget   After budget            
Under age 50                    $50,000         $55,000         $25,000
Over age 50 (until 30/6/2012)           $100,000                $100,000                $50,000
Non-concessional contributions cap      $150,000                $165,000                $150,000
3-year non-concessional cap             $450,000                $495,000                $450,000
CGT cap*                                $1,045,000      $1,100,000      $1,100,000
INDIVIDUAL TAX RATES                                                            
                        Tax                     Tax                             Tax
Current thresholds              rate    2009/10         rate    2010/11                 rate
$0 - $6000              0%      $0 - $6000      0%      $0 - $6000              0%
$6001 - $34,000         15%     $6001 - $35,000 15%     $6001 - $37,000         15%
$34,001 - $80,000               30%     $35,001 - $80,000       30%     $37,001 - $80,000               30%
$80,001 - $180,000              40%     $80,001 - $180,000      38%     $80,001 - $180,000              37%
$180,001+               45%     $180,001+       45%     $180,001+               45%
TAX RATE DOES NOT INCLUDE THE MEDICARE LEVY                                                             
LOW INCOME TAX OFFSET                                                           
                        2008/09         2009/10         2010/11+                                        
Maximum offset          $1200   $1350   $1500                   
Upper income threshold  $60,000 $63,750 $67,500                 
Max tax-free income             $14,000 $15,000 $16,000                 
* THE LOWER INCOME THRESHOLD WILL REMAIN AT $30,000 FOR ALL YEARS SOURCE: WLM FINANCIAL SERVICES
TAX-FREE THRESHOLDS FOR SENIOR AUSTRALIANS              
Year    Singles Couples*
2008/9  $28,867 $24,680
2009/10 $29,867 $25,680
2010/11 $30,685 $26,680
SOURCE IPAC SECURITIES *EACH