On 9 May 2017, Treasurer Scott Morrison released his second federal budget. His budget speech was titled ‘The right choices to secure better days ahead.’ He says our choices are based on ‘the principles of fairness, security and opportunity’.
Treasurer Morrison predicts the Federal Budget will return to balance in the 2020/2021 financial year, and remain in surplus beyond that year, at least in the medium term. In dollar terms, Morrison predicts there will be a deficit of $29.4 billion for the 2017/2018 year, but moving to a surplus of $7.4 billion by the 2020/2021 year.
Note: The true nature of this surplus is not clear because from the 2020/2021 year onwards, the earnings from the Future Fund (set up to meet the Government’s public sector defined benefit superannuation liabilities) will be counted towards the government’s coffers when calculating the budget’s underlying cash balance, while in previous years it has not been counted. Noting also that the government has decided to defer drawing down on this money and allow the money to be reinvested by the Future Fund until at least July 2021.
Morrison notes that roughly 75% of the increase in the country’s debt has been driven by welfare, health and education funding, and he states that this expenditure should be funded by taxes not by debt. From the 2018/2019 year, the government predicts it will no longer be borrowing to pay for everyday expenses.
Superannuation and retirement-related measures, including the First Home Super Saver Scheme and a downsizing incentive for over-65s, are set out below.
Note: A surprise announcement was the restoration of the Pensioner Concession Card for pensioners (in particular, Age Pensioners) who lost Age Pension entitlements when the harsher Age Pension assets test was introduced from 1 January 2017 (see later in this article for more details).
Reminder: Last year, Treasurer Morrison’s 2016 Federal Budget (his first budget) hurt many Age Pensioners and other retired Australians, and most of those changes will take full effect from 1 July 2017 (see SuperGuide article Latest superannuation rules: 2018/2019 guide).
Superannuation, retirement and income tax measures
The major retirement-related policies announced by Scott Morrison cover superannuation, Age Pension, income tax, Medicare levy, and other related measures. The key policies are set out below.
- Introduction of the First Home Super Saver Scheme. From 1 July 2017, eligible individuals can make voluntary superannuation contributions of up to $15,000 a year, and up to $30,000 in total, which can be saved for the purposes of buying a first home. The contributions are treated as concessional (before-tax) contributions and taxed at 15%. Withdrawals (which include earnings) are permitted from 1 July 2018, and will be taxed at the person’s marginal tax rate less a 30% tax offset. Alternatively, an individual can make non-concessional (after-tax) contributions, and such contributions are not taxed when withdrawn from the super fund. For more information, see SuperGuide articles First Home Super Saver Scheme a fizzer, again! and 10-point guide to First Home Super Saver Scheme.
- Incentive for over-65s to downsize, by permitting extra super contributions. From 1 July 2018, Australians aged 65 years or over will be able to contribute the proceeds of a house sale (up to $300,000 for an individual, or $600,000 for a couple) without having to satisfy a work test, and without having to worry about the annual $100,000 non-concessional contributions cap. In addition, individuals with a total superannuation balance of more than $1.6 million will still be able to make a superannuation contribution under this downsizing policy. For more information about the conditions of this proposed measure, see SuperGuide articles Over 65? Sell your home, and contribute more to super and Contributing super by downsizing your home: 10-point guide.
- SMSF borrowings to count towards $1.6 million transfer balance cap, and $1.6 million total superannuation balance. Effective from 1 July 2017 (and subject to legislation), the outstanding balance of an LRBA will be included in a member’s annual total superannuation balance, and the repayment of the principal and interest from a member’s accumulation account will be recorded as a credit in the member’s transfer balance account. For more information on how the transfer balance cap works, see SuperGuide article Retirement phase: A super guide to the $1.6 million transfer balance cap. For more information on how a $1.6 million total super balance stops you from making after-tax contributions, see SuperGuide article 2018/2019 guide to non-concessional contributions (after-tax super contributions).
- Non-arm’s length transactions subject to stricter rules. From 1 July 2018 (and subject to legislation), SMSFs using related party transactions on non-commercial terms (to increase super savings), will need to take into account expenses that normally apply to a commercial transaction when assessing whether the transaction is on a commercial basis.
- Higher SMSF penalties from 2017/2018 year. The size of administrative penalties jumps from July 2017 for SMSFs doing the wrong thing. For more information, see SuperGuide article What are the penalties for SMSF non-compliance?.
- Extension of tax relief for merging superannuation funds until 1 July 2020, rather than lapsing from 1 July 2017. This measure applies to large super funds and this tax relief has been available since December 2008. This relief allows super funds “to transfer capital and revenue losses to a new merged fund, and to defer taxation consequences on gains and losses from revenue and capital assets.
Income tax and Medicare levy measures
- National Disability Insurance Scheme and extra 0.5% Medicare levy. The Medicare levy will increase to 2.5% of taxable income, from the current 2.0%, from 1 July 2019, to help fully fund the National Disability Insurance Scheme (NDIS). This increase will raise $8.2 billion over 4 years. From 1 July 2019, one-fifth of the Medicare levy collected will be paid into the NDIS Savings Fund. The additional levy is effectively an extra 0.5% income tax for most Australians, but in my view, is a legitimate and worthy impost to fund such an important scheme. For more information, see SuperGuide article Medicare levy will not increase to further support NDIS.
- Removal of Temporary Budget Repair Levy by June 2017, as planned. The Temporary Budget Repair Levy, which added 2% extra tax on high-income earners for 3 years, will no longer apply from 1 July 2017. For more information on this levy, see SuperGuide articles Australian personal income tax cuts from 2018/2019 year and Australian personal income tax cuts from 2018/2019 year.
- Increase in income tax threshold means less tax for some. Announced in the 2016 Federal Budget, the Coalition government has increased the income threshold before the personal marginal tax rate of 37% applies, from $80,000 to $87,000 from the 2016/2017 year. This measure means the 32.5% tax rate will apply for taxable income up to $87,000, and will mean a lower income tax bill from the 2016/2017 year, for those currently earning more than $80,000. For information on this change, and the current income tax rates, see SuperGuide articles Australian personal income tax cuts from 2018/2019 year and Income tax: Australian tax brackets and rates (2018/2019 and previous years).
- Increase in Medicare levy low-income thresholds from 2016/2017 year. The thresholds for singles will be increased to $21,655, and the family threshold will be increased to $36,541 plus $3,356 for each dependent child. For single seniors and pensioners, the threshold will be increased to $34,244 and the family threshold for seniors and pensioners increases to $47,670 plus $3,356 for each dependent child or student.
- Small business $20,000 tax deduction. Extension for another year (to 30 June 2018), of the $20,000 immediate deduction for small business with a turnover of less than $10 million. An expensive policy, but small business are the “engine room” of this country, and clearly the policy has been working if the government are extending the concession. According to the budget papers, “around 3.2 million small businesses employ 5.6 million Australians and contribute $380 billion to the economy.” From 1 July 2018, the immediate deductibility threshold will revert to $1,000.
- Reduction of company tax rate to 25% by 2026/2027 year. The eventual reduction in the company tax rate will also reduce the value of franked dividends for SMSFs. If the company tax rate drops to 25%, so does the level of franking credits (which are based on 30% company tax rate in most cases) linked to Australian company dividends.
- Family Tax Benefit Part A and Part B. The government is not increasing the maximum rate of Family Tax Benefit Part A, and the Family Tax Benefit (Part B) rate will not be indexed for 2 years.
- Negative gearing rules toughened. From 1 July 2017, deductions for travel expenses will not be allowed for inspecting, maintaining or collecting rent for investment properties. For properties bought from 9 May 2017, the government will limit plant and equipment depreciation deductions to only deductions directly incurred by investors.
Age Pension measures
- One-off Energy Assistance payment to Age Pensioners and other pension recipients. On 20 June 2017, a single Age Pensioner resident in Australia will receive a one-off payment of $75, while a couple receiving the Age Pension and resident in Australia will be paid $125 combined. Individuals will qualify for this payment if they are resident in Australia and receiving the Age Pension, Disability Support Pension, Parenting Payment Single, the Veterans’ Service Pension and the Veterans’ Income Support Supplement, Veterans’ Disability Payments, War Widow/er Pension, or permanent impairment payments under certain rehabilitation legislation.
- Restoration of the Pensioner Concession Card for pensioners (in particular, Age Pensioners) who lost Age Pension entitlements, when the harsher Age Pension assets test was introduced from 1 January 2017. Reinstating the PCC will enable pensioners to access concessions on rates and other services, including subsidised hearing services. For more information on the January 2017 Age Pension assets test changes, see SuperGuide article Age Pension: 300,000 Australians lost entitlements on 1 January 2017.
- Stricter Age Pension residency requirements. From 1 July 2018, individuals claiming the Age Pension or the Disability Support Pension, will have to prove 15 years of continuous Australian residence to be eligible for the benefit, unless the individual satisfies one of two conditions:
- 10 years of continuous residency in Australia, with 5 years of this residency during their working life (working life is 16 years of age to Age Pension age), OR
- 10 years of continuous residency in Australia, and has not received an activity-tested income support payment for a cumulative period of 5 years.
- Widow Allowance, Partner Allowance, and Widow B Pension and Wife Pension to cease. Widow Allowance and Partner Allowance which are both closed to new recipients will cease on 1 January 2022. Widow B Pension and Wife Pension, which are both closed to new recipients, will cease on 20 March 2020.
- Improving Centrelink call centres and information sharing with ATO, and fraud prosecutors. Increasing staff in Centrelink call centres by 250 full-time equivalent roles, sharing TFN and other tax information between Centrelink and ATO, and using information held by Department of Human Services for fraud prosecutions.
- Medicare levy, PBS, hospitals, health research. Introduction of a Medicare Guarantee Fund from 1 July 2017, to guarantee Medicare and the Pharmaceuticals Benefits Scheme. Proceeds from the Medicare levy will be paid into the fund, and the fund will pay all expenses on the Medicare Benefits Schedule and the PBS. An additional $1.2 billion in new medicines will be made available under the PBS. Funding to hospitals will increase by $2.8 billion over 4 years, and an additional $1.4 billion in health research.
- Financial literacy funding of $16 million to ASIC. The financial regulator, ASIC, will receive $16 million over 4 years, starting from the 2017/2018 year to broaden its financial literacy program. According to the government, “this will assist ASIC in promoting investor and consumer confidence, trust and participation in the financial system, by the provision of impartial information, tools and guidance”. The cost will be partially offset by a levy imposed on entities regulated by ASIC. See next bullet.
- Imposition of a levy on all entities regulated by ASIC, to fund financial literacy and unclaimed monies. The government will raise $112.6 million over 4 years by imposing a levy all entities regulated by ASIC, from 1 July 2017.
- Improve claims processing at Department of Veterans’ Affairs. During the 2017/2018 year, $13.5 million will be given to DVA to process rehabilitation, compensation and income support claims, to reduce current backlog of claims.
- Small business information campaign. The government is giving Treasury $15 million over 2 years to spend on a small business information campaign (beginning in April 2017) to educate small business about the programs available to assist them, such as the cut in company tax rate to 27.5% from 1 July 2016, and to 25% from July 2016, and the increase in the unincorporated tax discount to 8% from 1 July 2016, and to 16% by 1 July 2026.
- New complaints body for banks and financial institutions, known as the Australian Financial Complaints Authority.
- A levy on banks (0.06%) starting from 1 July 2017. The levy will be imposed on 5 largest banks, and does not apply to super funds or life insurance companies. This levy will raise $5.5 billion over 4 years.