Our Reserve Bank has kept interest rates at a record low level because our economic growth is quite modest – wages growth is still very slow and inflation remains below target.
It took Government several years to restore tax revenues after 2014 when the commodity boom ended because companies were using past years’ losses to reduce their tax. Stronger Government revenue at last began coming through in October last year due to improved commodity prices and employment growth. Even so, our debt remains high.
All government debt (Federal, State and Local) is almost 48% of GDP. There’s limited room to improve this as our exports still rely heavily on China (coal and iron ore) and the Reserve Bank warns we’re vulnerable if China slows sharply. But compared with Government debt, our household debt is huge by world standards – twice average disposable income. This pressures the Reserve Bank to keep interest rates low, lest many be tipped into loan default.
While Australia is not in crisis, we’re not in a strong position and may find ourselves under pressure if an external crisis arises. So in this context, the Government has been deciding whether to cut taxes or reduce our deficit. In the end, they chose a blend of the two.
Some Budget issues
This year’s Federal Budget offers some deficit reduction and a three step income tax reduction plan. Otherwise, there’s $24.5 billion for transport infrastructure work and several smaller outlays. Among these, $1.9 billion will go to the National Collaborative Research Infrastructure Strategy. Also, $1.6 billion will help 14,000 of the 100,000 elderly people awaiting Home Care packages so they can stay in their own homes as long as possible.
Income tax cuts are planned over six years via tax rate threshold changes and tax offsets. Step 1 – if you earn up to $37,000 a year you’ll get an extra $200 tax offset as well as established offsets; between $37,001 and $47,999 you’ll get a tax rebate after June 2019 of up to $530 p.a. or the maximum of $530 if you earn between $48,000 and $90,000. Step 2 protects taxpayers from bracket creep and Step 3 aims for a simpler and flatter income tax system by abolishing the 37% tax bracket in 2024/5
Tax deductions will be denied for expenses associated with holding vacant land.
Minor beneficiaries of a testamentary trust will be taxed under general minor tax rates if the income involved does not derive directly from the deceased estate.
Self managed superannuation funds can have up to 6 members rather than the current limit of 4. Funds with good record-keeping and compliance history may move to a three-yearly audit cycle.
The work test for super contributions when aged 65-74 will be removed, and some longevity retirement income products may be more concessionally treated under the age pension means testing than originally proposed.
Personal income tax
Several changes are planned, reducing personal income tax on a staggered basis over six year from 1st July 2018. As this involves future elections and potential for global change, we place more importance on the immediate changes. The Medicare levy will remain at 2%.
Increasing tax bracket thresholds
The 32.5% upper threshold will rise from $87,000 to $90,000 from 1st July 2018, saving $135 tax for those earning over $90,000 p.a.
This threshold rises to $120,000 from 1st July 2022 and the 19% upper threshold will rise from $37,000 to $41,000 then.
After 1st July 2024, the top 32.5% threshold will rise from $120,000 to $200,000. The top marginal tax rate of 45% will then apply for taxable income over $200,000 and 32.5% for taxable incomes of $41,001 to $200,000.
Denying deductions for vacant land
Expenses associated with holding vacant land will stop being deductible from 1st July 2019 and won’t be carried forward. Such expenses for land that was previously vacant will only become deductible when:
- construction is complete, approval for occupancy has been granted and the property is available for rent, or
- the land is used in carrying on a business.
The ATO will get extra funding to assist its compliance management when taxpayers over-claim deductions or entitlements. The funding will complement and strengthen the ATO’s data matching and pre-filling activities.
Changed Taxation of testamentary trusts
Minors are taxed as adults for income paid on assets or cash proceeds held within a testamentary trust. From 1st July 2019 minors receiving testamentary trust income deriving from assets unrelated to the deceased estate will be taxed the same way as other income earned. Normal testamentary trust income that does directly derive from a deceased estate will still be taxed at adult rates in the hands of minors. This should not impact the majority of testamentary trusts. It aims to stop schemes where extra capital unrelated to the deceased is injected into a testamentary trust. (Complexity may lie in the detail with regard to the implementation of this measure).
Taxation – Business
Cash payments to Business owners limited to $10,000
From 1st July 2019, payments for goods or services to businesses above $10,000 can no longer be paid with cash – only paid electronically or via cheque.
Transactions with financial institutions and consumer to consumer (non-business) transactions are not subject to this cash limit.
$20,000 instant asset write-off extended
The instant asset write-off for business assets up to $20,000 is proposed to be extended until 30th June 2019. This allows businesses with aggregated turnover under $10 million to immediately deduct eligible assets bought at less than $20,000. It will assist small business cash flow with an ability to claim more deduction on buying eligible assets.
Removing tax deductibility of non-compliant payments to employees and contractors
To cope with the black economy, a Black Economy Package removes tax deductibility of non-compliant payments. From 1st July 2019, business can’t claim tax deductions for payments to their employees where they haven’t withheld any PAYG payment, despite PAYG withholding requirements applying. Deductions will also be removed for payments made by businesses to contractors where the contractor provides no ABN and the business doesn’t withhold any PAYG amount, despite the withholding requirements applying. So businesses must ensure they meet the PAYG obligations when making payments to employees and contractors to be able to claim a deduction on them.
The maximum number of members in self-managed superannuation funds (SMSFs) and small APRA funds will increase from four to six from 1st July 2019.
SMSFs with good record-keeping and compliance history will move from annual to three-yearly audit from 1st July 2019 (3 consecutive clear audit reports and timely annual returns).
Work test exemption when balances under $300,000
From 1st July 2019 if you’re aged 65 to 74 and have total superannuation less than $300,000 you can make voluntary super contributions in the financial year after you last met the work test. Eligibility to be based on your total superannuation balances at the start of the financial year after you last met the work test.
If you have multiple employers you can opt out of the Superannuation Guarantee
If you earn over $263,157 from multiple employers, you can nominate that your wages from certain employers are not subject to the Superannuation Guarantee (SG) from 1st July 2018. This lets you avoid unintentionally breaching the concessional contributions cap when receiving SG contributions from multiple employers. In doing this you might negotiate extra income instead, taxed at marginal tax rates.
Opt-in basis for default insurance inside superannuation
Default insurance arrangements in superannuation funds that now requires members to opt-out of cover, will be changed to an opt-in basis. This change will apply to members:
- with a balance less than $6,000
- under age 25 years, or
- with an inactive account (i.e. hasn’t received a contribution) for 13 months or more.
The changes would begin on 1st July 2019. A 14 month transition will allow affected members to decide whether or not to opt-in. The Government will also consult publicly on how to balance retirement savings objectives and insurance cover inside super.
Passive fees, exit fees and inactive super
From 1st July 2019, a 3% annual cap on passive fees applies to superannuation accounts with balances below $6,000.
Exit fees will also be banned on all superannuation accounts.
Superannuation funds must also transfer inactive accounts (i.e. that receive no contribution for at least 13 months) with a balance of less than $6,000 to the ATO. The ATO will reunite inactive accounts with active accounts where the consolidated account value will be at least $6,000.
Super funds must offer Comprehensive Income Products for Retirement (CIPR)
A retirement income covenant will be added into the Superannuation Industry (Supervision) Act 1993, requiring trustees to develop a strategy to help members achieve their retirement income objectives. The covenant will require trustees to offer CIPRs to provide individuals with income for life. The Government will be releasing a position paper for consultation on this measure shortly.
Notice of intent to claim a tax deduction
From 1st July 2018, the process for members claiming a tax deduction for contributions made to super will change. The Government is concerned some people claim a tax deduction and do not notify the fund. This means the fund does not tax the contribution, resulting in reduced collection of tax revenue.
Expansion of the Pension Loan Scheme
From 1st July 2019 all Australians of age pension age will be eligible, including full rate age pensioners (currently excluded from the scheme). The maximum loan amount will increase from 100 to 150% of age pension. The loan is paid fortnightly, tax-free and currently attracts 5.25% compound interest on the outstanding balance.
Extending the Pension Work Bonus
From 1st July 2019, the bonus will rise from $250 to $300 per fortnight so the first $300 of income from work each fortnight won’t count towards the pension income test. Eligibility will extend to the self-employed, subject to a ‘personal exertion’ test, reflecting the intention that the bonus not apply to investment income.
New means testing rules for lifetime retirement income products
From 1st July 2019, a fixed 60% of all pooled lifetime product payments will be assessed as income. So, 60% of the purchase price of the product will be assessed as assets until age 84, or a minimum of 5 years, and then 30% for the rest of your life. This provides some confidence and stability for developing innovative products to help retirees manage the risk of outliving their income while ensuring fair and consistent means test treatment.
Carer Allowance – now means tested
The Carer Allowance of $127.10 per fortnight is available to people caring for someone with a disability, severe illness or is frail aged. A $250,000 family income test threshold is to apply for Carer Allowance payment, which is currently not means tested. The intention is to help provide funding for new support services for unpaid carers.
Improving access to residential and home care – extra funding will offer improved access to aged care for older Australians. There are 105,000 older Australian awaiting Home Care Packages to enable them to stay in their own homes as long as possible. One of the aged care measures includes 14,000 new high level home care packages over four years from 2018/19 and 13,500 residential aged care places in 2018/19. There are four levels of home care packages ranging from basic care needs (level 1) through to high-level care needs (level 4).
From 1st July 2018, the Government will combine the Residential Care and Home Care programs. This will provide greater flexibility in the mix of home care and residential aged care places.
Contact one of our independent advisers now to discuss the possible impacts of this years Budget on your personal situation.
Disclaimer: All information in this article is intended to be general in nature for discussion purposes only. So you should not rely on it and seek personalised professional advice before making any decision.