With the Federal Budget brought forward to Tuesday the 2nd of April this year (ahead of the upcoming federal election) it is timely to provide an overview of the Budget proposals relating to Super, Tax & Social Security, and consider how these proposed measures would affect clients and their financial plans. To a large extent, we can look at the Budget as part of the Government’s re-election campaign, and so it’s also worth summarising the Opposition’s policies on the same topics.
Key Budget Proposals:
Building on the measures announced in the last budget, the Government has proposed increases to the Low and Middle Income Tax Offset (LMITO), changing the base amount from $200 to $255 per year and the maximum amount from $530 to $1,080 per year. Taxpayers with income between $48,000 and $90,000 will be eligible to receive the maximum offset of $1,080. The offset phases out with incomes up to $126,000. This is proposed to apply form 1 July 2019, assuming the Government can legislate the changes during the April Parliamentary sitting days. The LMITO is due to end on 30 June 2022.
From 1 July 2022, the Government will extend the threshold for the 19 per cent tax rate from $41,000 to $45,000. The Government will also increase the Low Income Tax Offset from $645 to $700 per year. Taken together, these changes make up for the removal of the LMITO on 30 June 2022.
From 1 July 2024, the Government will reduce the 32.5 per cent tax rate to 30 per cent, abolish the 37 per cent tax rate and increase the threshold for the 30 per cent tax rate to $200,000. Treasury estimates these changes will result in 94 per cent of Australian taxpayers facing a marginal tax rate of 30 per cent, which will apply to incomes between $45,001 and $200,000.
Super & retirement
Improving Flexibility for Older Australians: Currently, people aged 65 to 74 must be in paid work for a minimum of 40 hours in any consecutive 30-day period in the financial year to make voluntary super contributions. This “work test” requirement does not apply to super contributions made before age 65.
The Government is proposing to change the application of this work test so that, from 1 July 2020, the work test will only be necessary where contributions are made by clients aged 67 to 74.
People aged 65 and 66 will also be able to make up to three years of non-concessional contributions under the bring forward rule.
Those up to and including age 74 will be able to receive spouse contributions, with those 65 and 66 no longer needing to meet the work test.
Aged Care: The Government will provide $320 million for a one-off increase to the basic subsidy for residential aged care recipients. $35.7 million will be provided to increase the dementia and the veterans’ home care supplements to support home care recipients who require additional care to stay in their homes longer.
In addition, there were a number of other measures to provide additional Home Care packages, Home Support services, Dementia support and Elder Abuse services.
Key Labour proposals
Franking Credits: Labour proposes to remove cash refund of excess Franking Credits, with the exclusion of government pension/allowance recipients. SMSFs with at least one government support recipient member at 28 March 2018 will also be exempt (but SMSFs with members who only later become payment recipients will not become exempt). According to the Tax Institute, around 320,000 individuals will be exempt (and thus still continue to receive Franking Credit Refunds) while around 840,000 will lose their refunds.
It has been noted that many SMSFs are either in full pension mode, or have the majority of assets in pension mode, and thus have limited ability to offset Franking Credits against other tax liabilities. Conversely, many large industry and retail funds will have the ability to utilise Franking Credits to offset tax payable on behalf of non-pension (accumulation) members. Apart from a potential shift away from SMSFs, many commentators are suggesting this proposal could see a dramatic shift of asset allocation away from Australian shares towards International shares, or other property or infrastructure assets.
Taxation of Trusts: Bill Shorten in his “A Fairer Tax System for All Australians” media release dated 30 July 2017 announced that Labour would introduce a standard, minimum 30% tax rate for discretionary trust distributions to mature beneficiaries (people over age 18). Labour’s proposal would exclude Special Disability Trusts and Testamentary Trusts. However it would include family trusts used for business as well as investment purposes, and there is ambiguity as to whether SMSFs might be adversely affected also. Presently, distributions from discretionary trusts are taxed as normal income in the hands of the recipient, at their personal tax rates.
Limit Negative Gearing: Labour stated in its “Positive plan to help housing affordability” that it will limit negative gearing to new housing after a certain date post-election. All investments made before this date will be grandfathered. The proposal indicates that, after the commencement date, losses from shares and non-newly constructed properties can only be offset against other investment income (not wages), or else carried forward to offset the final capital gain on sale of the asset.
Increase Capital Gains Tax: Labour proposes to reduce the current CGT discount of 50% (for assets held more than 12 months) to 25% from 1 July 2019. Investments made before this date will be grandfathered, and superannuation assets will be excluded, as will small business assets.
Limit tax deductions for Tax advice: Labour proposes to limit deductions for tax advice to $3,000 a year. Individuals, trusts, SMSFs and partnerships are subject to this cap, while companies would not be. It is noted that complex structures, and significant one-off life events can often require specialist advice well in excess of this limit.
Accelerated Increase to Super Guarantee: Labour has proposed to accelerate the timeline for increases to the Superannuation Guarantee rate (compulsory super contribution rate) as well as target an eventual 15% rate.
Reduced NCC cap: Labour will lower the annual non-concessional (after tax) cap from $100,000 to $75,000.
Division 293 threshold: Currently, individuals earning over $250,000 are taxed an additional 15% on super contributions, Labour proposes to lower this threshold to $200,000.
Cancel personal tax-deduction for personal contributions: From 1 July 2017, individuals have been able to claim a tax deduction for their personal contributions (in the same way a self employed person does). This was introduced as a way to ensure fairness for employees whose employer would not facilitate salary sacrifice. Labour proposes to remove this ability.
Ban on new SMSF borrowings: Labour is committed to banning new SMSF borrowing arrangements as part of their housing affordability policy. A media release by Bill Shorten claimed that this would “help cool an overheated housing market, partly driven by wealthy SMSFs”.
Limit tax free earnings in pension to $75,000: Labour has intimated a plan to restrict tax-free earnings for pension accounts to $75,000 pa, however it is unclear whether this is through a new system, or amendments to the recently introduced “Transfer Balance Cap” system (that limits the balance that can be transferred into the tax-free superannuation pension phase) and essentially achieves a similar outcome.
It is worth noting that these proposals from both parties are not yet law. As always, we are on hand to assist you with understanding and responding to the changes as they progress. Please contact us should you require any advice or assistance with your plans.
Published : 15 Apr 2019