The Federal Opposition and the minor parties in the Senate are doing a lot of chest thumping over the latest Federal Budget.

They say they will block many of the changes because they are unfair. But as we all know, this is all bluff. Come July the Government will have a majority in the Senate and will be able to do what it likes. The budget measures will pass - eventually.

So what do these measures mean for investors? Well there have been big tax cuts especially for those on higher incomes. This will have implications for other investment strategies ranging from salary packaging, income splitting, tax minimisation schemes, becoming incorporated and borrowing to invest.

The very silly superannuation surcharge applying to high-income earners will be abolished from next financial year and changes are in the pipeline to allow couples to split superannuation contributions.

These last two measures will make super a much more attractive investment for those on higher incomes.

Depending a bit upon your income, the tax cuts and the superannuation changes may also mean that you could simplify your financial affairs. Becoming incorporated simply to save tax may no longer be worth it.

Those high-risk tax minimisation schemes will be less attractive while traditional investments will start to stack up as real alternatives.

The biggest changes in the budget were the alterations made to the top marginal income tax rate.

The top 47 per cent tax rate, which currently cuts in when taxable income reaches $70,001, will change in the next financial year and again the year after.

The 47 per cent rate will cut in at $95,001 for the 2005/06 year and at $125,001 the year after.

According to the Government the tax scale changes mean that from 2006 only three per cent of income earners will be in the top tax bracket.

Salary packaging is expected to get a big boost from the budget. The biggest effect will be with superannuation. Higher income earners will find it more attractive to salary sacrifice into super.

The tax on contributions will be just 15 per cent compared with 27.5 per cent with the full super surcharge – abolished from July 2005 – or 47 per cent if taken as salary. Over time this difference can make a huge difference to the final super payout.

The same applies to the high income self-employed who claim a deduction on their contributions. No super surcharge means that contributions will be taxed at only 15 per cent.

The super surcharge was introduced by the Labor Government to prevent high-income earners exploiting the system. But the arrangements were so complicated that it became an administrative nightmare with super funds charged with the responsibility of determining who should pay the surcharge.

The point is that if you want to stop high-income earners rorting the system it is easier to hit them when they eventually take the money out of super. But of course this does mean that the Government misses out on revenue in the short term.

The budget also confirmed the Government’s intention to allow spouse splitting of contributions into super. The idea is that a high-incomes earner can split their super contribution with a spouse.

Details are still sketchy and it does not come into force until 2006 but it could radically change the super landscape. A couple can put twice as much into super before hitting problems with reasonable benefit limits.

Income splitting will also become more popular. The higher tax brackets mean that income from investments can be split more effectively with a spouse or through a family trust.

Under current tax scales for example you could direct only $70,000 in non-earned income to a non-income earning spouse before the top marginal tax rate cut in.

Under the scales operating from July 2006 this amount leaps to $125,000.

If you use a family trust you can direct even more to other family members although special tax rates still apply to unearned income directed to a minor.

While talking families, changes announced in the budget make it easier for couples who are divorcing and who have binding financial agreements. Under the changes capital gains tax can be deferred when assets are transferred from one party to another when divorce occurs.

Currently this could only happen if the couple went through the family court.

Under the new provisions the court does not have to be involved. This makes the process less complicated and expensive. However like all budget announcements we have to wait and see what the actual legislation says.

So what about negative gearing? Is it still attractive?

If the tax changes mean that you are no longer in the top marginal tax bracket then the ongoing loss you make on the investment is not worth as much in terms of a tax deduction.

For example if you made a $100 loss then the tax savings on the 47 per cent bracket would be $47. If your tax rate was 43 per cent then the tax saving would be only $43. You absorb more of the loss.

However the aim of gearing to invest is not (or shouldn’t be) to reduce tax. It should be to make a profit, usually in the form of a capital gain when the asset is sold.

The good news is that the lower tax rate means you pay less in capital gains tax.

One offsets the other.

In short, negative gearing is still attractive providing it is done for the right reasons.

And of course if the investment returns a profit rather than a loss, then the new tax arrangements make it even more attractive because the tax on income from the investment will be lower.