Treasurer Wayne Swan and Finance Minister Lindsay Tanner have unveiled a secret weapon to maul the finances of higher income families – and all in the name of tax “fairness”. And their 2008 attack is only the first round because I fear there is more to come.

A large number of middle income families negatively gear property or shares and/or salary sacrifice into superannuation or into reportable fringe benefits with two objectives in mind. The first is to save tax and second to enable their families to receive education, and other allowances. It is also sometimes used to lower dependency payments. Losses on investments can have a similar effect

The tax deductibility of negative gearing and salary sacrifice has not been touched in the budget but from July 1 2009, in assessing means-tested income, the amounts salary sacrificed, the negative gearing benefits, the fringe benefits and the investment losses will all be added onto income. And so the new income test for the family tax benefits is to be calculated on the increased income. The same applies to education and many other allowances.

The caps on family benefits are stated as being subject to a $150,000 “income” limit, but for people with less than three children the cut off point is less than that and will be less again once the new definitions are used.

From July 1 2009, the medical benefit surcharge thresholds of $100,000 for singles and $150,000 for couples will be defined using the new calculations of income – effectively for many people the thresholds will be lowered.

There are other attacks on middle income Australia including subjecting “meal card” arrangements to FBT (where the employer pays for meals consumed by the employee on the premises as part of a salary package) and removing FBT exemption for work related items mainly used for private purposes such as laptops plus other FBT tightening moves. All of these items will cause major reviews of many current salary packages.

The second round of middle income blows will start with school fees. Middle income families in Victoria are going to be hit with much higher private school fees as a result as the big teacher pay rises in the state system spread to private schools, especially as there does not seem to be any provision in the budget for increased help to private schools to help pay for the rises. Those teacher pay rises are certain to quickly spread to other states and will present a major impost on those sending their children to private schools. This will multiply the effect of the reduction in Government help.

Once income for social services is reduced by these items then every budget from now on will have speculation that negative gearing and salary sacrificing will be curbed in calculating income.

And as it happens, claiming tax deductions in excess of income (negative gearing) to buy shares and now residential houses has not been very profitable in the last 12 months, given the fall in asset values. (And as I will explain in another article later this evening, the Rudd government is trying to increase the supply of low cost homes.)

Given that tax rates have been reduced, the tax reduction manoeuvres will become less popular among middle income earners.