Tuesday the 3rd of May was a big day in Australia’s economic landscape. The RBA cash rate reached a new record low of 1.75% and Australia was presented with “an economic [sic] plan for Jobs and Growth”. The Budget introduces wide ranging tax reform, surprising many that believed policy reform went ‘off the table’ with GST.
Key budget proposals have been made to reform superannuation, corporate taxation and the governments approach to tackle youth employment. Other notable proposals outlined defence and infrastructure spending, adjustments to personal income tax and ongoing innovation initiatives. Generally speaking, the government was unable to reduce spending but has presented a road map for jobs and growth, eventually leading back to fiscal consolidation in 2020.
Notable areas left alone were negative gearing, climate change and immigration reform.
Evidently, the rhetoric of budget deficit control as a imminent need has been dropped off the since 2014. Spending as a portion of GDP has remained flat, albeit at record highs, of over 25%.
To successfully acheive fiscal consolidation, this budget is relying on growth, recovering global economic conditions and somehow keeping a lid on government spending (but certainly not reducing it).
Key Budget Stats
- Australia’s Budget deficit is forecast at $37.1b
- A balanced budget is forcast to occur in financial year 2020/21
- Goverment debt is at $326b or 18.9% of GDP
- Real GDP forecast at 2.5%. Modelled increasing to 2.75% and then 3.00% GDP growth in forward estimates
- 37% personal income tax bracket moves from $80k to $87k
- Net debt position projected to peak in financial year 2017/18 at 19.2%
- Lifetime ‘after tax contribution cap’ for super of $500,000 (effective immediately).
- $50b on infrastructure spending
- Government Reciepts of $411b
- Government payments of $445b
- Size of economy of $1,629b
The Financial Planning Impact
This budget will significantly reduce the tax effectiveness and capacity to use superannuation as a retirement savings vehicle (More detail in the superannuation section). The reforms see the brunt of this impact falling on high net worth and high income earning individuals and families.
For individuals whose wealth in super remains below $1.6m per person, superannuation will continue to remain attractive. For the next generation of savers, the lifetime cap on after tax contributions to super means that earlier consideration of salary sacrificing arrangements should be canvassed to overcome this non-concessional restriction.
There is also a reduced incentive for income earners above $250,000 to make extra contributions to superannuation. This will likely result in a rise in alternate structures being used for wealth accumulation or potentially even an increase in offshore wealth accumulation structures for significant income earners.
With reduced tax incentives on both higher incomes and large super balances, retaining income within company structures and delaying distribution until retirement will present opportunities to generate a more tax efficient outcome in some circumstances. This will be particularly attractive to those who can more flexibly structure their income earning arrangements.
You could be forgiven for thinking that it wasn’t Budget night this Tuesday May 3, but in fact, a simple presentation by Scott Morrison, on the governments “economic plan for jobs and growth”
When the Finance, (to be known hence-forth as) Jobs and Growth Minister Mathias Cormann was asked on Lateline, shortly after the budget, when the government shifted their focus from reducing deficits? Naturally the answer was ‘this is a plan for jobs and growth’.
When Malcolm Turnbull was questioned by Fran Kelly what in this budget assisted the 75% of workers under the average full-time income? The answer was “all of the measures of the budget are consistent with our plan for jobs and growth”.
Jobs and growth is a strong theme. It is being hammered home by the government, with all answers ‘seamlessly’ weaving in the phrase ‘jobs and growth’. The government has used this budget to position itself as the preffered economic custodian to stear us through Australia's adjustment to a post mining/construction economy.
How is it being received?
In previous budget responses, Bill Shorten called for a reduction in corporate tax to 25%, so it can be expected that Labor will support this measure. Additionaly, superannuation changes, primarily targetted at the top 4% of superannuation investors, is also likely to be supported by Labor. (Fitting seeing as much of this reform was originally proposed by Labor previously). These changes to super should be enough to see this budget painted as fair as they are hugely significant to those they effect.
Battle lines are firming with the Coalition Government putting forward a centralist style budget and selling their economic credentials. Meanwhile, the Labor party will most likely attack this budget on what it has ignored. Nnegative gearing and immigration will underpin sensitive issues surrounding housing affordability and current immigration disquiet.
This Budget also fell short of meeting Gonski education reforms and has only temporarily delayed university deregulation.
Labor's Budget response this Friday will cement the battlelines for what will be a long election campaign.
Big changes to superannuation rules will greatly reduce the tax advantages of this structure to high income earning individuals and families. The proposed changes to superannuation are designed to make it fairer. Key changes to come into effect on July 1 are;
- Establishing a lifetime non-concessional contributions cap of $500,000, effective immediately
- Cutting the annual cap on concessional contributions to $25,000 from the current $30,000 ($35,000 for those over 50)
- Requiring people with combined incomes and superannuation contributions of more than $250,000 to pay 30% tax on concessional contributions, up from 15%
- Introducing a Low Income Superannuation Tax Offset to replace the Low Income Superannuation Contribution when it expires on 30 June 2017 for individuals. This will allow people with an adjusted taxable income of $37,000 or less to receive an effective refund of some of the tax paid on their contributions, capped at $500
- Introducing a transfer balance cap of $1.6 million on amounts moving into the tax-free retirement phase
We are most strongly opposed to the lifetime non-concessional contribution cap. We believe this is unnecessary in light of newly introduced pension cap restrictions as this limits excessive tax concession upon exit. We expect that this policy will actually most significantly impact income earners who are unable to maximise their concessional contributions throughout their working life, but require greater flexibility to contribute proceeds from one-off downsizing of the family home or business sale, to then better self fund their retirement.
Introduction of $1.6 million superannuation transfer balance cap on pensions
- From 1 July 2017, the Government will introduce a $1.6 million transfer balance cap on the total amount of accumulated superannuation an individual can transfer into the pension phase. Subsequent earnings on these balances will not be restricted.
- Where an individual accumulates amounts in excess of $1.6 million, they will be able to maintain this excess amount in an accumulation phase account, where earnings will be taxed at the concessional rate of 15 per cent.
- Members already in the pension phase with balances above $1.6 million will be required to reduce their pension balance to $1.6 million by 1 July 2017. Excess balances for these members may be converted to superannuation accumulation phase accounts.
- A tax on amounts that are transferred to pension phase in excess of the $1.6 million cap (including earnings on these excess transferred amounts) will be applied, similar to the tax treatment that applies to excess non concessional contributions.
- The amount of cap space remaining for a member seeking to make more than one transfer into a pension account will be determined by apportionment.
- Commensurate treatment for members of defined benefit schemes will be achieved through changes to the tax arrangements for pension amounts over $100,000 from 1 July 2017.
Transition to retirement income streams
- The Government will remove the tax exemption on earnings of assets supporting Transition to Retirement Income Streams from 1 July 2017 (income streams of individuals over preservation age but not retired).
- It will also remove a rule that allows individuals to treat certain superannuation income stream payments as lump sums for tax purposes.
Changes to retirement income products
From 1 July 2017, the tax exemption on earnings in the retirement phase of income streams will be extended to products such as deferred lifetime annuities and group self-annuitisation products to promote product innovation.
Contribution rules for those aged 65 to 74
- From 1 July 2017, the Government will improve the flexibility of the superannuation system by removing the current restrictions on people aged 65 to 74 from making superannuation contributions for their retirement.
- In addition, people under the age of 75 will no longer have to satisfy a work test and will be able to receive contributions from their spouse.
The introduction of a lifetime cap
- The Government will introduce a $500,000 lifetime non concessional contributions cap. This lifetime cap will take into account all non-concessional contributions made on or after 1 July 2007 and will commence at 7.30 pm (AEST) on 3 May 2016 - this means for those who have already partially used or exceeded this cap, they may only be able to contribute a reduced amount or no longer be able to contribute at all.
- Contributions made before commencement cannot result in an excess. However, excess contributions made after commencement will need to be removed or subject to penalty tax. The cap will be indexed to average weekly ordinary time earnings.
- The lifetime non concessional cap will replace the existing annual caps which allow annual non concessional contributions of up to $180,000 per year, (or $540,000 every three years for individuals aged under 65).
- After tax contributions made into defined benefit accounts and constitutionally protected funds will be included in an individual's lifetime non concessional cap. If a member of a defined benefit fund exceeds their lifetime cap, ongoing contributions to the defined benefit account can continue but the member will be required to remove, on an annual basis, an equivalent amount (including proxy earnings) from any accumulation account they hold.
- The amount that could be removed from any accumulation accounts will be limited to the amount of non-concessional contributions made into those accounts since 1 July 2007.
- Contributions made to a defined benefit account will not be required to be removed. The Government will consult to ensure broadly commensurate and equitable treatment of individuals for whom no amount of post 1 July 2007 non concessional contributions are available to be removed.
Low income spouses
- From 1 July 2017, the Government will increase access to the low income spouse superannuation tax offset by raising the income threshold for the low income spouse to $37,000 from $10,800.
- The low income spouse tax offset provides up to $540 per annum for the contributing spouse and builds on the Government's co contribution and superannuation splitting policies to boost retirement savings, particularly of women.
Low Income Superannuation Tax Offset (LISTO)
- From 1 July 2017, the Government will introduce a Low Income Superannuation Tax Offset (LISTO) to reduce tax on superannuation contributions for low income earners.
- The LISTO will provide a non refundable tax offset to superannuation funds, based on the tax paid on concessional contributions made on behalf of low income earners, up to a cap of $500.
- The LISTO will apply to members with adjusted taxable income up to $37,000 that have had a concessional contribution made on their behalf.
Lower contribution caps
From 1 July 2017, the Government will reduce the annual cap on concessional superannuation contributions to $25,000 (currently $30,000 under age 50; $35,000 for ages 50 and over).
Catch up for unused contributions cap amounts
- From 1 July 2017, the Government will allow individuals to make additional concessional contributions where they have not reached their concessional contributions cap in previous years.
- Access to these unused cap amounts will be limited to those individuals with a superannuation balance less than $500,000. Amounts are carried forward on a rolling basis for a period of five consecutive years, and only unused amounts accrued from 1 July 2017 can be carried forward.
- This change allows people to carry forward their unused concessional cap, providing an opportunity to 'catch up' if they have the capacity and choose to do so.
- The measure will also apply to members of defined benefit schemes and consultation will be undertaken to minimise additional compliance impacts for these schemes.
Taxation of contributions for high income earners
- From 1 July 2017, the Government will lower the point at which high income earners pay additional contributions tax from $300,000 to $250,000.
- The lower income threshold will also apply to members of defined benefit schemes and constitutionally protected funds currently covered by the tax. Existing exemptions (such as State higher level office holders and Commonwealth judges) for Division 293 tax will be maintained.
- From 1 July 2017, the Government will include notional (estimated) and actual employer contributions in the concessional contributions cap for members of unfunded defined benefit schemes and constitutionally protected funds.
- Members of these funds will have opportunities to salary sacrifice commensurate with members of accumulation funds. For individuals who were members of a funded defined benefit scheme as at 12 May 2009, the existing grandfathering arrangements will continue.
Tax deductions for contributions
- From 1 July 2017, the Government will improve flexibility and choice in superannuation by allowing all individuals up to age 75 to claim an income tax deduction for personal superannuation contributions, irrespective of their employment arrangements.
This effectively allows all individuals, regardless of their employment circumstances, to make concessional superannuation contributions up to the concessional cap. This measure seems to remove the current ‘10% rule’ for determining whether personal contributions are tax deductible.
Individuals who are partially self-employed and partially wage and salary earners, and individuals whose employers do not offer salary sacrifice arrangements will benefit from these changed arrangements.
Individuals that are members of certain prescribed funds would not be entitled to deduct contributions to those schemes. Prescribed funds will include all untaxed funds, all Commonwealth defined benefit schemes, and any State, Territory or corporate defined benefit schemes that choose to be prescribed.
From 1 July 2017, the government will remove the anti-detriment provision which could apply to death benefit payments made to beneficiaries.
The anti-detriment payment represents a refund of a member’s lifetime superannuation contributions tax payments to a beneficiary, where the beneficiary is the dependant of the member (spouse, former spouse or child).
- The 37% personal marginal tax bracket kick in level moves from $80,000 to $87,000
Increased marginal tax threshold
- From 1 July 2016, the Government will increase the 32.5 per cent personal income tax threshold from $80,000 to $87,000.
- This measure will reduce the marginal rate of tax on incomes between $80,000 and $87,000 from 37 per cent to 32.5 per cent.
Medicare levy low income thresholds
- The Government will increase the Medicare levy low income thresholds for singles, families and seniors and pensioners from the 2015 16 income year. The increases take account of movements in the Consumer Price Index so that low income taxpayers generally continue to be exempted from paying the Medicare levy.
- The threshold for singles will be increased to $21,335. For couples with no children, the threshold will be increased to $36,001 and the additional amount of threshold for each dependent child or student will be increased to $3,306.
- For single seniors and pensioners, the threshold will be increased to $33,738. For senior and pensioner couples with no children, the threshold will be increased to $46,966 and the additional amount of threshold for each dependent child or student will be increased to $3,306.
Medicare Levy Surcharge, Private Health Insurance Rebates
The Government will continue the pause on indexation of the income thresholds for the Medicare Levy Surcharge and Private Health Insurance Rebate for a further three years.
Business Taxation & Enterprise
- Corporate tax rate lowered to 25% in 10 years for all companies. Transitioning to 27.5% and then 25% in 2027.
- Targeting multi-national companies
- The instant write-off for equipment purchases of up to $20k set to expire on 30 June 2017 has been extended to businesses with a turnover of less than $10 million
Corporate Tax Changes
- From 1 July the small business tax rate will be lowered to 27.5% and the turnover threshold to access it will increase from $2 million to $10 million
- Each year the turnover threshold for access to the lower company tax rate of 27.5% will be extended to more businesses, from $10 million to $25 million in 2017-18, to $50 million in 2018-19 and $100 million in 2019-20
- Phase two will see the threshold continuing to step up each year until 2023-24, before reducing the 27.5% rate for all businesses to 25% at the end of 10 years in 2026-27
- An increase in the unincorporated small business tax discount to 8% and an extension of the threshold from a turnover of $2 million to less than $5 million
- From 1 July 2016 the instant write-off for equipment purchases of up to $20,000 will be extended to businesses with a turnover of less than $10 million
Innovation and entrepreneurship
- Backing co-investment in new spin-offs and starts-ups created by Australia's research institutions, through the CSIRO with the CSIRO's accelerator programme being expanded
- Reforms to employee share schemes and crowd-sourced equity funding to make it easier for start-ups to raise capital
- Changes to company tax loss arrangements
- Public/private partnerships through the government Cyber Security Strategy to back Australian businesses to develop and promote their cyber security capabilities globally
A crackdown on multinational tax avoidance is expected to raise around $3.9bn in revenue over the next four years.
New laws will be backed up by an operational taskforce of more than 1000 specialist staff in the Australian Taxation Office (ATO) to police and prosecute avoiders.
There will also be a new diverted profits tax, similar to one in the UK that taxes multinationals on income they have sought to move offshore.
It will attract a penalty rate of 40%. This kicks in on 1 July 2017.
The new tax will target companies that shift profits offshore through arrangements involving related parties:
- That result in less than 80 per cent tax being paid overseas than would otherwise have been paid in Australia;
- Where it is reasonable to conclude that the arrangement is designed to secure a tax reduction; and
- That do not have sufficient economic substance.
Social security and welfare is the largest government expenditure. The government expects to spend $158.61b.
Key planning initiaive are;
- Directing savings from social services to an endowment fund that represents that capital base required to fund the future expenditure associated with funding the national disability scheme
- Cracking down on welfare fraud
THe government is in the process of attempting to reform family benefit's at present but has to date failed at passing legislation in the senate.
- The Government will establish a Youth Jobs Path program for young job seekers aged under 25 years to improve youth employment outcomes. The pathway has three elements:
- Industry-endorsed pre-employment training (Prepare) — from 1 April 2017, training for up to six weeks will be provided to develop basic employability skills, including those required to identify and secure sustainable employment.
- Internship placements of up to twelve weeks (Trial) — from 1 April 2017, job seekers will receive a $200 fortnightly incentive payment and businesses will receive $1,000 upfront to host an intern. Placements will be voluntary and will be organised by employment services providers. Job seekers must be registered with jobactive, Disability Employment Services or Transition to Work, and have been in employment services for at least six months to be eligible for the internship program
- Youth Bonus wage subsidies (Hire) — from 1 January 2017, employers will receive a wage subsidy of up to $10,000 for job seekers under 25 years old with barriers to employment and will continue to receive up to $6,500 for the most job-ready job seekers. Job seekers must be registered with Jobactive or Transition to Work, and have been in employment services for at least six months for employers to be eligible for the wage subsidy.
- In addition, from 1 October 2016, the most job ready job seekers, to be known as Stream A job seekers, will enter the Work for the Dole phase after 12 months of participation in Jobactive, instead of the current six months.
Other Government Expenditures
Efficiency dividends for Government departments
Savings generated from reductions in Public Sector roles will result in the third largest savings measure this budget, targetting savings of $1.9b.
Listed in Appendix D of the Turnbull government’s Budget overview and escalating savings over three years is the “Public Sector Transformation and Efficiency Dividend.”
The hit to the public service sector has been partly tempered by a $500 million “reinvestment” pool intended to fund further public service productivity and transformation, the core definitions of which are still yet to be disclosed, but will have to appear by next year.
Starting from 2017-18, savings expected are $298.6m in its first year and snowballing by more than $100 million a year to $510.5 million in 2018-19 and $614.6 in 2019-20.
The Government will maintain the efficiency dividend at 2.5 per cent in 2017-18, then reduce it to 2 per cent in 2018-19 and further reduce it to 1.5 per cent in 2019-20.
“This tapered reduction in the efficiency dividend reflects the diminishing scope for new efficiencies as Australian Government agencies become leaner,” The Budget Papers say
The Budget has givent the SBS and ABC a much needed hall-pass on major saving initiatives. These were much talked about prior to the budget. Although spending will remain flat into the future, this is positive given that expectations had been jaw-boned significantly lower.
The Government expects to spend $2 billion more on health in the next financial year compared to the current financial year. This lift total expected spending to $71.41b next financial year.
The Federal Government saves $51.4 million over the next four years by removing or amending items it pays rebates for on the Medicare Benefits Schedule (MBS). This continues the fee freeze until 2019-20.
Major spending initiatives are;
- Medical services and benefits (up 4% or 1.2b)
- Pharmaceutical benefits and services (up 4.5% or $491m)
- Assistance to the States for public hospitals (up 4.2% or $716m)
- Aboriginal and Torres Strait Islander health (up 7% or $52m)
The total spend on education in this year’s budget is A$33.7 billion. This includes an agreement to fund schools to the tune of $1.2 billion between 2018 and 2020. This is contingent on education reform from the states and territories.
Higher Education Reforms
The higher education reforms, which included the deregulation of university fees, were announced in the 2014 budget and will now be delayed for another year.
The government has deferred its Jobs for Families Package until 1 July 2018, due to delays in securing approvals for the Family Tax Benefit reforms.