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Federal budget 2018: tax cuts and super reform

Measures introduced last night may affect your clients’ strategies, writes Byron Smith.

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In the federal budget handed down yesterday, the last before the next election, the government launched a seven-year $13.4 billion plan for cutting Australian workers’ taxes. It also made some superannuation reforms and introduced measures to improve conditions for senior Australians.

By and large the focus of this budget is on low and middle-income earners, helping the young get a little more out of their super, letting pensioners make more money without being penalised and starting to reduce the tax burden of the general population. With the tax cuts front and centre, your clients’ finances may be set for modest improvements, which may broaden in the years ahead.

Tax cuts

Pre-budget buzz about “modest” tax cuts were delivered in a seven-year plan with the cuts starting small and building over time. They peak in the 2024-25 financial year when the second-highest tax bracket (at 37 per cent) will be abolished.

But the first target is middle and lower-income earners. That is, those earning $90,000 per year and less were the main focus where they will receive a non-refundable tax offset of up to $530 beginning next financial year and continuing for the three beyond that.

The biggest change is in the middle tax bracket (at 32.5 per cent). This currently applies to those earning $37,001 to $87,000.  From July 1, 2018 it will apply for those earning up to $90,000 and in 2022-23 that threshold will be further increased to $120,000.  And in 2024-25 that tax bracket will be greatly expanded to those earning $41,001 to $200,000 – the vast majority of Australian workers.

Our chief economist wraps up the federal budget 2018-19

Proposed tax threshold changes

Tax rate (%) Current ($) July 1,2018 ($) July 1, 2022 ($) July 1, 2024 ($)
0 0-18,200 0-18,200 0-18,200 0-18,200
19 18,201-37,000 18,201-37,000 18,201-41,000 18,201-41,000
32.5 37,001-87,000 37,001-90,000 41,001-120,000 41,001-200,000
37 87,001-180,000 90,001-180,000 120,001-180,000 (no longer exists)
45 180,001-plus 180,001-plus 180,001-plus 200,001-plus

Source: Budget Papers

As you can see in the table above, high-income earners will also benefit from the broadening tax brackets, with one of the most most obvious benefits being the changes occurring in 2024-25 when the top tax threshold (with a tax rate of 45 per cent) will be raised to those earning more than $200,000. Consequently, the top tax threshold will only apply to about 6 per cent of taxpayers (which should only be 6 per cent of taxpayers). Compared to today’s tax rates as much as $7,225 will be cut from the tax bill of those with an income of $200,000.

Federal Treasurer Scott Morrison said the tax cuts were “not spending or a give-away” but were about enabling Australians to keep more of what they earned.

One reason Morrison cites for motivating the tax cuts is that bracket creep is due to become a big issue: “Under our personal tax plan, 94 per cent of Australian taxpayers will pay no more than 32.5 cents in the dollar. That compares to 63 per cent if we leave the system unchanged.”

ANZ economists Cherelle Murphy and Jack Chambers said they are supportive of the personal tax plan: “This was necessary to give households some relief from bracket creep, which would have eaten up some disposable income.”

But they described it as complex, pointing out how it has been introduced in stages to “isolate the benefits to low and middle income earners in the first place and lessen political criticism”.

Business

Tax deductions for eligible asset purchases less than $20,000 by businesses with aggregate annual turnover of less than $10 million will continue, with the government extending the measure into the new financial year.

Business owners can claim the deduction on the asset in one go rather than depreciating it over several years. It’s been the case for the past few years but the extension of the provision will be welcomed by small businesses.

Tax offsets for eligible research and development “benefiting Australia” will continue, but proving such eligibility will become tougher.

Under the measure, certain eligible entities with turnover of less than $20 million can receive a refundable tax offset for such research, while a non-refundable tax offset is available for other organisations that are eligible.

The overhaul of the rules is meant to prevent companies claiming tax breaks for general business activity and narrow in on those with a committed R&D program.

With a focus on multinationals, the government will tighten rules around stapled structures, broaden application of the multinational anti-avoidance law and the diverted profits tax, while strengthening rules that stop companies loading up on debt to shift profits offshore.

Seniors

To make it easier for senior Australians to stay at home, rather than go into care, the government is providing funds for in-home care of $1.6 billion over the next four years. This should increase the number of home care places by 14,000.

There are also several changes to the pension, with the work bonus scheme being expanded: pensioners can earn $300 a fortnight (or $7800 a year) without impacting their age pension. The work bonus will also be extended to the self-employed.

In the financial year following retirement, the superannuation work test will not apply to those aged 65 to 74 with a super balance below $300,000.

National

Higher commodity prices, company profits and employment – all bringing in more tax revenue has put the economy in a good position. The tax cuts and some of the other generous budget measures are affordable because the Australian economy is strong.

The budget is forecast to return to a modest balance of $2.2 billion in 2019-20 and increase to projected surpluses of $11 billion in 2020-21 and $16.6 billion in 2021-22. Meanwhile, government debt continues to climb with the deficit in the 2018-19 federal budget equal to 0.8 per cent of Australia’s gross domestic product.

National infrastructure was a key target for the government in its budget. The $75 billion 10‑year national infrastructure plan is across every state and territory and is focused on improving road safety, tackling congestion and delivering rail links. These include the Melbourne Airport rail link; upgrading the M1, which links Melbourne to the Gold Coast; various road and rail projects in Western Australia; and Sydney’s freight rail; among others. 

In other initiatives, $500 million will be dedicated to restoration work on the Great Barrier Reef, and $140 million for Queensland to attract Hollywood film productions. Over four years from 2018-19 to grow the Australian space industry including to establish a National Space Agency, the government will provide $41 million. 

In their bottom-line assessment, ANZ's economists said the government spent less of the increase in tax revenue than expected, allowing the budget to return to balance one year earlier than previously expected.

“That fiscal prudence has come at the ‘cost’ of fewer giveaways than might have been the case ahead of an election. We expect the government to gain favourable comment for banking some of the revenue gains with enough left over for a variety of measures, include personal income tax cuts.”

 

2018-2019 Federal Budget at a glance:  Click to view (infographic)   

Superannuation

The government will make it easier for clients to cost-effectively manage their super through five main measures:

  • Superannuation accounts of $6000 or less can only have maximum passive fees of 3 per cent.
  • There will be a ban on fees to exit a superannuation fund.
  • The Australian Taxation Office will consolidate inactive super accounts with balances below $6000 with active ones.
  • Life insurance in super will be opt-in for the young and inactive or low-balance accounts.
  • Allowing recent retirees to make additional super contributions through a work test exemption.

With the changes to insurance, Morrison said young people would no longer have to pay for insurance they don’t want or need. But The Association of Superannuation Funds of Australia sounded a dire warning, with chief executive officer Martin Fahy saying “many young people have dependants and financial commitments so in the instance of a tragic event occurring, particularly disablement early in life, having insurance in place is extremely valuable”.