On 8 May 2018, the Government delivered the 2018-19 Federal Budget, and it would be reasonable to say that this Budget starts to lay a foundation for the next Federal election.
The focus of the budget was building a stronger economy by creating jobs and guaranteeing essential services. As most households have had to tighten their budgets over the past few years, the Treasurer has announced that the Government must also live within its means. He highlighted how the Government has made real progress in getting the budget back on track and that they have stayed on track for a surplus for six successive budget updates.
From a pure financial planning and wealth perspective, the positive news from this year’s Budget is that the changes are minimal in number compared to prior years, and largely positive in nature. With changes to personal taxation thresholds and tax offsets from 1 July 2018 over a seven year period, measures to reduce possible erosion of super balances, particularly for low balance accounts, and allowing age pensioners to earn more before their pension is reduced, there is something for nearly everyone in this Budget.
As is always the case, these measures will need to pass through the legislative process before they become law, and may change during that process.
Personal Income Tax Plan
The Government has announced a 7 year personal income tax plan. Step 1 seeks to provide permanent tax relief to low and middle income earners. Step 2 provides relief from bracket creep by increasing the threshold of the 32.5% personal income tax bracket. Step 3 seeks to simplify and flatten the personal tax system by removing the 37% tax bracket entirely.
Step 1 – Low and Middle Income Tax Offset (LMITO) Effective date: 1 July 2018 – 30 June 2022
The Government will introduce a non-refundable tax offset of up to $530 per annum to Australian resident low and middle income taxpayers. The offset will be available for the 2018/19, 2019/20, 2020/21 and 2021/22 financial years and will be received as a lump sum after assessment of an individual’s income tax return.
The benefit of the Low and Middle Income Tax Offset (LMITO) is in addition to the existing Low Income Tax Offset (LITO).
Step 2 – Protecting middle income earners from bracket creep Effective date: 1 July 2018 – 1 July 2022
The Government has announced an extension of the top threshold of the 32.5% personal income tax bracket from $87,000 to $90,000. This measure is to apply from 1 July 2018.
From 1 July 2022, the Government intends to increase the maximum Low Income Tax Offset (LITO) from $445 to $645 and will extend the 19% personal income tax bracket from $37,000 to $41,000. The increased LITO will be withdrawn at a rate of 6.5 cents per dollar between incomes of $37,000 to $41,000 and at a rate of 1.5 cents per dollar between incomes of $41,000 and $66,667.
The Government intends to further increase the top threshold of the 32.5% personal income tax bracket from $90,000 to $120,000 from 1 July 2022.
Step 3 – Simplifying the personal tax system Effective date: 1 July 2024
From 1 July 2024, the Government intends to simplify the personal tax system by removing the 37% tax bracket entirely.
Retaining the Medicare Levy rate at 2% Effective date: 1 July 2019 Affected clients: Those subject to the Medicare levy
In 2014 the Medicare levy was increased from 1.5% to 2.0% of taxable income to help fund the National Disability Insurance Scheme (NDIS).
In the 2017 Federal Budget it was proposed to further increase the Medicare levy to 2.5% of taxable income from 1 July 2019 to ensure the NDIS was fully funded into the future. The Government will not proceed with this measure and the Medicare levy will remain at its current level of 2.0% of taxable income.
Increasing the Medicare levy low-income thresholds Effective date: 1 July 2017
The Government has announced they will increase the Medicare levy low income thresholds for singles, families, seniors and pensioners from the 2017/18 financial year.
Income tax exemption for certain Veteran Payments Effective date: 1 May 2018
From 1 May 2018, the Government exempted certain Veteran Payments from income tax. The Veteran Payment is designed to provide immediate short-term financial assistance to vulnerable people who may be experiencing financial difficulty while their claims for a mental health condition are being assessed.
The Government has stated that supplementary amounts of Veteran Payments (such as pension supplement, rent assistance and remote area allowance) paid to a Veteran, and full payments (including supplementary component) made to the spouse or partner of a veteran who dies, are exempt from income tax.
Extension of $20,000 instant asset write-off for small business Effective date: 1 July 2018 Affected clients: Small businesses with a turnover of up to $10 million
The $20,000 instant asset write-off allowing a small business with turnover less than $10 million a tax deduction for the purchase of assets worth up to $20,000 was due to end on 30 June 2018. This tax concession will now be extended for a further 12 months to 30 June 2019.
Assets valued at $20,000 or more (which cannot be immediately deducted) can continue to be placed into a small business simplified depreciation pool and depreciated at 15 per cent in the first income year and 30 per cent each income year thereafter.
The reduced tax liability resulting from the tax deduction frees up cash flow for small business owners which can be used to sustain and/or expand their businesses.
From 1 July 2019, it is proposed that the asset value thresholds will revert to the previous $1,000 limit.
Deny deductions for vacant land Effective date: 1 July 2019
From 1 July 2019, the Government will deny deductions for expenses associated with holding vacant land, including interest costs, when the land is not genuinely held for the purpose of earning assessable income.
This measure will not apply to expenses associated with holding land that are incurred after a property has been constructed on the land, it has received approval to be occupied and is available for rent, or the land is being used by the owner to carry on a business including a business of primary production.
Remove access to small business CGT concessions for assignment of partnership rights Effective date: 7:30pm AEST on 8 May 2018 Affected clients: Partners that alienate their income by creating, assigning or otherwise dealing in rights to the future income of a partnership
The small business CGT concessions assist owners of small businesses by providing relief from CGT on the disposal of assets related to their business. However, some taxpayers, including large partnerships, are able to inappropriately access these concessions in relation to their assignment of a right to the future income of a partnership to an entity, without giving that entity any role in the partnership.
The measure applies from 7:30pm (AEST) on 8 May 2018 for small business CGT concessions in relation to the assigned rights.
Strengthening Division 7A unpaid present entitlement rules Effective date: 1 July 2019
From 1 July 2019, the Government will ensure present entitlements to come within the scope of Division 7A.
Any unpaid present entitlement must be repaid to the private company over time as a complying loan or subject to tax as a dividend.
Remove the capital gains discount at the trust level for Managed Investment Trusts Effective date: 1 July 2019
Managed investment trusts (MITs) and attribution MITs (AMITs) will be prevented from applying the 50% capital gains discount at the trust level.
This measure will prevent beneficiaries that are not entitled to the CGT discount in their own right from getting a benefit from the CGT discount being applied at the trust level.
Better integrity over deductions for personal contributions Effective date: 1 July 2018
The ATO will develop a new compliance model and undertake additional compliance activities to improve the integrity of the notice of intent to claim a tax deduction process.
It has been identified that some individuals have received deductions for personal super contributions without submitting a notice of intent to claim the deduction to their super fund, resulting in a deduction claimed without tax being applied to their contribution to super.
Amongst other measures, income tax returns will be modified to alert individuals to the notice of intent requirements and require confirmation from the individual that they have complied, as well as providing guidance to individuals around how to comply if they have not already done so.
Work test exemption for recent retirees Effective date: 1 July 2019
Currently, eligible individuals aged 65 or older who want to make a voluntary contribution to super must meet the work test.
From 1 July 2019, the Government has announced it intends to introduce an exemption from the work test for voluntary contributions for recent retirees. The exemption will be available in the first year that a recent retiree does not meet the work test requirements. To qualify for this exemption, the client must be aged 65 to 74 years with a super balance below $300,000.
This measure will provide retirees additional flexibility around when they choose to make contributions to super as they transition into retirement.
Capping passive fees, banning exit fees and reuniting small and inactive accounts Effective date: 1 July 2019
The Government has announced a 3% annual cap on passive fees charged by super fund on accounts with balances below $6,000. The Government has also announced a ban on exit fees on all superannuation accounts.
In addition to this, the Government has announced all inactive accounts with balances below $6,000 will be required to be transferred to the ATO. The ATO will expand its data matching process in an attempt to reunite these inactive accounts with the member’s active account.
Changes to default insurance in Super Effective date: 1 July 2019, with a 14 month transition for members to decide whether to opt-in Affected clients: Clients with super balances below $6,000, clients below age 25 and those whose account has not received a contribution in 13 months and are inactive
The Government has announced changes to the default super arrangements for those with balances below $6,000; below age 25; and those whose super accounts has not received a contribution in 13 months and are inactive.
From 1 July 2019, these clients will be required to opt-in to default insurance inside super.
This measure attempts to ensure younger Australians’ savings are not eroded by insurance premiums they don’t need or don’t know they have.
Preventing inadvertent concessional cap breaches by certain employees Effective Date: 1 July 2018 Affected clients: Individuals whose combined income exceeds $263,157 from multiple employers
Currently, individuals with multiple employment arrangements each requiring the payment of superannuation guarantee (SG) contributions can find themselves in a position where their combined SG exceeds the concessional contribution cap of $25,000.
The Government will allow individuals with multiple employers and combined income exceeding $263,157 to nominate for their wages from certain employers to not be subject to SG.
In lieu of this payment, employees may negotiate to receive additional income to avoid breaching their concessional cap which would otherwise result in excess contributions tax and a shortfall interest charge.
Maximum number of members in SMSFs and small APRA funds to increase from 4 to 6 Effective Date: 1 July 2019 Affected clients: Existing and new SMSF trustees and members; APRA fund administrators
The Government has reiterated the measure previously announced by Hon. Kelly O’Dwyer to increase the maximum number of allowable fund members in an SMSF and small APRA fund from four to six members.
The intention of this measure is to provide greater flexibility when it comes to the joint management of retirement savings for larger groups such as families who may previously have found themselves restricted by existing member limits.
Three-yearly audit cycle for some SMSFs Effective Date: 1 July 2019
SMSFs with a history of good record-keeping and compliance will have their annual audit requirement increase to a three-yearly cycle.
To qualify for this measure SMSF trustees will need to demonstrate a history of three consecutive years of clear audit reports and having had lodged the fund’s annual returns in a timely manner.
Pensioner Loans Scheme Effective date: 1 July 2019
Currently, the Pension Loans Scheme (PLS) is only available to part-pensioners and nil rate pensioners of Age Pension age or whose partners are Age Pension age. The maximum fortnightly payment is limited to the maximum basic pension rate plus the pension supplement.
From 1 July 2019, the PLS will become available to full and part pensioners and self-funded retirees of Age Pension age. The maximum fortnightly payment will be increased to 150% of the current rate.
Full rate pensioners may be able to receive an increased cash flow up to $11,798.80 per annum for singles or $17,786.60 per annum for couples.
The increased limit may be an alternative source of cash flow for those who have limited financial investments but have equity in their home or other Australian real estate. However, increased PLS drawdowns will also mean the client’s equity in their property reduces at a faster rate.
Pension Work Bonus Effective date: 1 July 2019
Under the current pension work bonus, the first $250 per fortnight of income from employment that is earned by a person who is Age Pension age is not counted as assessable income. Any bonus unused in a fortnight can be carried forward (up to total carried forward balance of $6,500) and can be used to reduce employment income in future fortnights.
Income over the $250 per fortnight exemption is added to other assessable income under the income test and the normal rules apply to determine the amount of pension payable.
From 1 July 2019, the pension work bonus will be increased to $300 per fortnight (total carried forward balance of $7,800). The pension work bonus will also apply to self-employment income. There will also be a personal exertion test to ensure that the work bonus only applies to employment and self-employed income.
Those clients who are still working and are affected by the income test, may receive an increased amount of the Age Pension.
Increase to the Newly Arrived Resident’s Waiting Period for new migrants Effective date: 1 July 2018
The current Newly Arrived Resident’s Waiting Period before new migrants can apply for allowances and family payments is currently 104 weeks. It was previously proposed that the waiting period will be extended to 156 weeks from 1 July 2018. It is now proposed to extend the waiting period to 208 weeks (3 to 4 years). The longer waiting period will impact clients who are granted permanent residency and some temporary visas on or after 1 July 2018.
Newly arrived migrants will have to ensure they can support themselves without Government support for a longer period.
Better access to Youth Allowance for regional students Effective date: 1 July 2018
The parental income cut-off for the Youth Allowance means test for regional students will be increased from $150,000 per annum to $160,000 per annum. For each additional child the income test will be further increased by $10,000. The parental income in the year before the beginning of the 14 month self-supporting period will be used. This measure will allow regional students more certainty about their parent’s income will be under the cut-off limit and helping the student decide when to take a gap year.
Means testing for lifetime products Effective date: 1 July 2019
New social security means testing will apply to pooled lifetime income streams which commence on or after 1 July 2019. Under the changes, 60% of the income payments and 60% of the full purchase price will count towards the income and assets test until the person attains age 84 or a minimum of 5 years. After this 30% of the income payments and 30% of the purchase price will count for the remainder of the person’s lifetime.
The measure will encourage pensioners to invest in pooled lifetime income streams which will allow them to receive regular income for their lifetime.
Cancellation of Disability Support Pension for those in prison Effective date: 1 January 2019
Recipients of the Disability Support Pension who are in prison will have their payments terminated after 13 weeks of suspension. These includes those who are already in prison or on remand in custody where they have been incarcerated for more than 13 weeks on or after 1 January 2019.
Better access to Aged Care
The Government is increasing spending to improve access to aged care. The following measures were proposed in the Budget 2018:
– The Government will add 14,000 home care packages in addition to 6,000 packages that were released in December 2017. This brings additional home packages to a total of 20,000. This will reduce waiting periods and will also benefit those receiving low level packages but have been assessed as needing high level care.
– Deliver improvements to My Aged Care including readily accessible information on issues that matter most for those in care, their relatives, and health and service providers. This will allow easier navigation of the aged care system and allow service providers better access to client referrals and client records.
– Design and implement streamlined consumer assessments for all aged care services by 2020. This will remove the complexity and inefficiency of the current system and reduce multiple assessments that clients undergo to determine their care needs.
– Introduce face to face services and outreach services to help older clients and their families make informed choices about their aged care needs. Aged care information hubs, community hubs, one-on-one specialist support, and aged care Financial Information Support Officers will be trialled to provide additional support with complex financial decisions for entrants to aged care.
– Support analysis of the proposal to transition the allocation of residential aged care places to the client rather than to aged care facilities to allow greater choice for older Australians.
– Simplify the process for entry to aged care and create a short form by for means testing clients with simpler financial affairs May 2019 to reduce complexity of assessments.
– Increase funding building improvements, maintenance and infrastructure expansion for regional, rural and remote aged care providers to improve access to aged care for older people living in these areas.
– From 1 January 2019 establish an Aged Care Quality and Safety Commission to consolidate the functions of the Australian Aged Care Quality Agency, the Aged Care Complaints Commissioner, and from 1 January 2020, the aged care regulatory functions of the Department of Health. This will enhance coordination, better access to information, and an improved ability to identify and respond to concerns and issues.
– Provide funding to residential aged care services to help with the transition to the new Aged Care Quality Standards commencing from 1 July 2019. The new standards will allow older Australians and their families a greater say in the quality of the care and services they receive.
– Improve protection for clients in residential aged care by establishing a robust risk profiling approach to identify risks to consumers and enable regulatory processes to address care failures by aged care providers. – Introduce a performance rating for residential aged care service providers and improve complaints processes for clients in residential aged care. This will allow clients to compare ratings of residential aged care providers.
– Improve palliative care provided by residential aged care facilities.
– Introduce a compulsory retrospective levy on residential aged care service providers where defaults exceed $3 million in any fiscal year and develop stronger prudential standards in managing accommodation payments held by residential service providers in order to protect the growing pool of accommodation payments.
– Improve mental health services for those aged over 75 years whose mental and physical health are at risk because of isolation and loneliness and new mental health services for clients in residential aged care who have been diagnosed with a mental disorder.
– Trial innovative approaches to support older Australians to increase levels of physical activity and to live independently for a longer period.
– Introduce online checks for people aged 45 to 65 to allow them to assess their health, future employment options and finances and access information.
– Increase the capacity of the Australian and New Zealand Hip and Fracture Registry (ANZHFR) to improve collection and access to data collection on older people recovering from a hip fractures.
– Design and pilot a program to improve care for dementia patients.