Tag Archives: the Australian economy

Federal Budget 2018/19 – What it means for you…

On Tuesday 8 May, the Federal Government handed down its Budget for the 2018–19 financial
year.

FEDERAL BUDGET 2018_What you need to know

Here’s a roundup of some of the key proposals put forward, and we take a look at how they might affect your financial goals — whether you’re starting out in your working life, building a career and family, or enjoying the fruits of your labor in retirement.

Remember, at this stage these are just proposals and not yet law. As such, they could change as legislation passes through parliament.

Personal income tax

1.Increase in tax bracket thresholds
The 32.5 per cent upper threshold will be increased from $87,000 to $90,000 from 1 July 2018. The existing threshold was increased from $80,000 to $87,000 from 1 July 2016.
The increase to $90,000 reduces the tax liability of those earning $90,000 or more by $135.
A further increase in this threshold to $120,000 is proposed from 1 July 2022.

In addition, the 19 per cent upper threshold will increase from $37,000 to $41,000 from 1 July 2022.
From 1 July 2024, the Government will extend the top threshold of the 32.5 per cent personal income tax bracket from $120,000 to $200,000, to recognize inflation and wage growth impacts.

Taxpayers will pay the top marginal tax rate of 45 per cent from taxable incomes exceeding $200,000 and the 32.5 per cent tax bracket will apply to taxable incomes of $41,001 to $200,000.

2.Low Income Tax Offset
The existing Low Income Tax Offset (LITO) will be increased to a maximum of $645 for those with taxable income less than $37,000 from 1 July 2022. LITO will phase out at 6.5% in the income range from $37,000 to $41,000, and at 1.5% thereafter.

3.Medicare levy thresholds for 2017-18
The threshold for singles will be increased from $21,655 to $21,980. The family threshold will be increased from $36,541 to $37,089. For single seniors and pensioners, the threshold will be increased from $34,244 to $34,758. The family threshold for seniors and pensioners will be increased from $47,670 to $48,385. For each dependent child or student, the family income thresholds increase by a further $3,406, instead of the previous amount of $3,356.

4.Increase in the Medicare levy
The Government will not proceed with the increase to the Medicare levy rate from 2.0 to 2.5 per cent of taxable income from 1 July 2019. The increase was originally announced in the Federal Budget 2017-18.

5.Denying deductions for vacant land
Expenses associated with holding vacant land will cease to be deductible from 1 July 2019 and will not be able to be carried forward.
Such expenses for land that was previously vacant will only become deductible when:

  • construction is complete, approval for occupancy has been granted and the property is available for rent, or
  • the land is used in carrying on a business.
    Denied deductions will not automatically be included in the cost base of a CGT asset. Taxpayers will need to assess the expenses against existing cost base element rules.

6.Ensuring tax compliance for individuals
Additional funding will be provided to the ATO to assist its compliance activities around taxpayers that over-claim deductions or entitlements.
The funding will complement and strengthen the ATO’s data matching and pre-filling activities.

7.Improving the taxation of testamentary trusts
Current rules allow minors to be taxed as adults in respect of income paid on assets or cash proceeds held within a testamentary trust.
This new measure, commencing on 1 July 2019, will ensure that minors are taxed in a manner consistent with other income earned and prevent assets being placed into a testamentary trust that were not related to the deceased estate.

8.Removing the CGT discount on gains made within a Managed Investment Trust (MIT) or Attribution MIT (AMIT)
Presently, MITs and AMITs are entitled to a 50% discount for capital gains made on assets held within the trust for longer than 12 months.
From 1 July 2019, this CGT discount will no longer be allowed at the trust level. This means each beneficiary taxpayer must determine their own entitlement to a CGT discount upon receiving a capital gain distribution through a MIT or AMIT.

Business owners

1.Continuation of small business asset write-offs ($20,000 threshold)
Small businesses will be given an additional 12 months to write off assets costing less than $20,000, provided they are installed ready for use by 30 June 2019.
Depreciation pools will continue to be allowed for assets costing $20,000 or more.

2.Economy wide cash payment limit of $10,000
From 1 July 2019, any payments for goods or services to businesses that exceed $10,000 will no longer be allowed to be paid with cash. They can only be paid electronically or via cheque.
Transactions with financial institutions and consumer to consumer (non-business) transactions will not be subject to this cash limit.

3.Removing tax deductibility of non-compliant payments
Where an employer fails to withhold an amount of PAYG from payments to an employee or to a contractor (where no ABN is provided), a deduction for the payment will be denied.
This measure will commence from 1 July 2019.

4.GST on online hotel bookings sold by offshore providers
The current exemption allowing offshore sellers of Australian hotel rooms online not to charge GST to consumers will be removed from 1 July 2019.
The proposal requires unanimous approval from the States and Territories and mirrors previous GST changes to digital products and low value importations.

5.Partnerships and small business concessions
The small business CGT concessions will no longer be available in respect of the disposal, creation or assignment of rights to future income of a partnership (also called an “Everett assignment”).
The measure will apply from the date of the budget, 7:30pm 8 May 2018.

Superannuation

1.SMSF member limit increase
The maximum number of members allowable in self managed superannuation funds (SMSFs) and small APRA funds will increase from four to six from 1 July 2019.

2.SMSF three-yearly audit cycle
SMSFs with a good record-keeping and compliance history will move from an annual audit to a three-yearly audit from 1 July 2019. To qualify the SMSF will be required to have three consecutive clear audit reports and lodged their annual returns on time.

3.Work test exemption for those with balances of less than $300,000
From 1 July 2019 those aged 65 to 74 with a total superannuation balance of less than $300,000 will be eligible to make voluntary contributions in the financial year following the year they last met the work test.
Eligibility will be assessed based on the individual’s total superannuation balances at the beginning of the financial year following the year that they last met the work test.

4.Individuals with multiple employers able to opt out of Superannuation Guarantee
Individuals who earn over $263,157 from multiple employers will be able to nominate that their wages from certain employers are not subject to the Superannuation Guarantee (SG) from 1 July 2018. This will allow eligible individuals to avoid unintentionally breaching the concessional contributions cap as a result of receiving SG contributions from multiple employers. Employees who use this measure could negotiate to receive additional income, taxed at marginal tax rates.

5.Improving the integrity of personal deductible super contributions
The Australian Taxation Office (ATO) will receive additional funding to improve the integrity of the process for deducting personal superannuation contributions from 1 July 2018. This will include a new compliance model and additional compliance and debt collection activities. A new acknowledgement will also be added to income tax returns to confirm that an individual who is claiming a deduction has met the ‘notice of intent’ requirements.

6.Opt-in basis for default insurance inside superannuation
The Government proposes to amend the default insurance arrangement in superannuation funds, which currently requires members to opt-out of cover, to be on an opt-in basis. This change will apply to members:

  • with a balance of less than $6,000
  • under the age of 25 years, or
  • whose account has been inactive (ie hasn’t received a contribution) for 13 months or more.

The changes are proposed to take affect from 1 July 2019. A transition period of 14 months will allow affected members to decide whether or not to opt-in.

7.Passive fees, exit fees and inactive super
From 1 July 2019, a three per cent annual cap on passive fees will apply to superannuation accounts where the balance is below $6,000. In addition, exit fees will be banned on all superannuation accounts.
Superannuation funds will also be required to transfer inactive accounts (ie that have not received a contribution for at least 13 months) with a balance of less than $6,000 to the ATO. The ATO will proactively reunite inactive accounts with active accounts where the value of the consolidated account will be at least $6,000.

Social security

1.Expansion of the Pension Loan Scheme
From 1 July 2019:

  • all Australians of age pension age will be eligible, including full rate age
  • ensioners (currently excluded from the scheme)
  • the maximum loan amount will increase from 100 per cent to 150 per cent of age pension.
    The loan is paid fortnightly, is tax-free and currently attracts compound interest of 5.25 per cent on the outstanding balance.

2.Extension of the Pension Work Bonus
From 1 July 2019:

  • the bonus will increase from $250 to $300 per fortnight. This means that the first $300 of income from work each fortnight will not count towards the pension income test
  • eligibility will be extended to the self-employed, subject to a ‘personal exertion’ test, reflecting the intention that the bonus not apply to investment income.

3.New means testing rules for lifetime retirement income products
From 1 July 2019:

  • a fixed 60 per cent of all pooled lifetime product payments will be assessed as income
  • 60 per cent of the purchase price of the product will be assessed as assets until age 84, or a minimum of 5 years, and then 30 per cent for the rest of the person’s life.

Aged care

1.Improving access to residential and home care
The Government will provide additional funding to deliver a package of measures to improve access to aged care for older Australians. The More Choices for a Longer Life package includes 14,000 new high level home care packages over four years from 2018/19 and 13,500 residential aged care places in 2018/19. It also includes funding to deliver home care packages and residential care in rural, regional and remote communities as well as preparatory work for a new national assessment framework for people seeking aged care.

A new Aged Care Quality Safety Commission is also proposed to be established to ensure the quality of care provided by the aged care system.

Note: What you need to know
Any advice in this document is general in nature and is provided by Halle Yilmaz, as a financial adviser at HQ Financial Solutions, an Authorised Representative of Lifespan Financial Planning Pty Ltd ABN 23 065 921 735, AFSL No. 229892. Halle is authorised to advice on super, pension and investment products. The advice here does not take into account your personal objectives, financial situation or needs. Therefore, before acting on this advice, you should consider the appropriateness of this advice having regard to those matters, products, and consider talking to a financial adviser before making an investment decision. Your Lifespan adviser or other professional advisers should be consulted prior to acting on this information. Taxation considerations are general and based on present taxation laws and may be subject to change. You should seek independent, professional tax advice before making any decision based on this information. This disclaimer is intended to exclude any liability for loss as a result of acting on the information or opinions expressed.

Source of the information on this newsletter: Colonial First State, and Macquarie.

Halle Yilmaz is a financial adviser and business consultant. As a financial adviser, she gives solid advice that can create rapid and lasting results for her clients. Sign up for her free E-Book and download “7 Steps to Healthy Wealth Management.” Follow Halle on Twitter @halleyilmaz

What the 2015 Budget means for the Australian economy

Event
The 2015-16 budget deficit forecast has been revised up to $35.1bn, more than double the estimate from 12 months ago, but a marginal improvement on the $41.1bn deficit expected for 2014-15.

Impact

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  • Fiscal policy will remain a drag on the economy in the budget year and through the forward estimates. There has been a slight moderation in pace, but the destination remains the same with a surplus still predicted in 2019-20.
  • The key difference between the 2015-16 budget and the disastrous 2014-15 budget is in the communication, and the nature of the measures. The harsh edges of many of the last budget’s measures have been smoothed, with policy decisions adding $9.3bn to the deficit over the forward estimates.
  • Confidence is likely to be boosted by the measures in the budget. Particularly the two key policy packages – the Jobs and Small Business, and Families packages.

Outlook

  • Clearly, the government has not missed calls for a fiscal catalyst to re-enliven the economy. Or at least heeded the message from the opinion polls. This year’s budget is clearly designed with a view to improving the government’s popularity. The economy may receive a boost in the meantime.
  • The key test for the 2015-16 budget is whether it boosts confidence. Expectations have been lowered. Even a ‘null’ in terms of impact on confidence across the economy could be considered a budget ‘win’ relative to last year. At first glance, the budget has the potential to better that outcome. But the communication task lies ahead.
  • Fiscal consolidation is still occurring in the budget. The pace of deficit contraction is marginally slower. The government is continuing to pursue structural budget repair despite the economy continuing to grow at a belowtrend pace and a rising unemployment rate. Whilst not ideal, the difference this time around is that the key policy packages in the budget are framed in a way that is designed to boost sentiment. It could just work.
  • Whilst the small business measures will boost confidence, and potentially demand and hiring, the opportunity to boost the economy with a substantive infrastructure package that boosts long-term potential and improves competitiveness (particularly around urban rail) has been squibbed. There was nothing new on the infrastructure front, and the government’s own forecasts imply continued weakness in public demand. If consumers and small businesses don’t respond, the RBA will be left to pick up the can for the economy.
  • Many of the longer-term challenges, such as dealing with excessively generous superannuation concessions and the discounted tax on capital gains, remain unaddressed. Longer-term agreements with the states for health and education still need to be funded. But for the short term, it appears that restoring confidence, and also popularity, is the over-riding focus.

Impact on households

  • Unlike the previous budget, where households were subjected to a range of budget nasties, the FY16 budget seems to have softened some of the blow for households – particularly at the lower end.
  • The key changes still result in the budget extracting savings from households, but the target of those savings has been redirected somewhat. On pensions, the decision to shift to CPI indexation has been reversed, which will put additional money in the hands of high marginal propensity to consume groups. But this has been partly offset with an increased taper rate for access to partpensions by wealthier households.
  • Reforms to the child care rebate will provide additional, simpler, support to households and are designed to encourage participation. But these changes come at the expense of subsidies for higher income parents, and also entail cuts to family tax benefit payments.
  • Reversals of ill-considered and unpopular measures from last year’s budget, such as the GP co-payment and the denial of access to unemployment benefits for 6 months, also softened the hits to households.
  • Overall, the impact on households is likely to be positive. The key outcome is likely to be alleviation, over time, of the dampening of consumer sentiment as the government looks to achieve a lift in popularity and electoral acceptance of its policy measures.

Impact on businesses

  • In the lead-up to the budget, the focus around businesses was directed on the moves to strengthen the integrity of Australia’s corporate tax system, particularly around profit shifting by foreign multi-nationals. However, overall – both directly and indirectly – the budget appears a net positive one for businesses.
  • Small businesses in particularly are the major winners, with a tax cut (the company tax rate for firms with turnover less than $2mn shifts from 30% to 28.5%). Unincorporated businesses will also receive a discount on income tax payable, up to $1,000 per annum. The cuts come at a cost to revenue of $3.3bn over the forward estimates.
  • The other win for small businesses is the reinstatement of the instant asset write off. As of 7:30pm, firms with turnover under $2mn will be able to instantly write off assets that cost less than $20,000 and are purchased between now and 30 June 2017. This is an enlarged version of the instant asset write-off that was originally cancelled as part of the mining tax roll-back. The impacts are two-fold, the boost to confidence should assist the general tone in the economy, and secondly, the demand for assets from small businesses should be a positive for larger entities – particularly in the retail sector.

The impact of the Budget on the economy

  • To assess the impact of the Budget on the economy a differentiation between discretionary policy changes and the automatic stabilisers needs to be made. The 2015-16 Budget reflects the combination of discretionary fiscal policy loosening providing a boost to the supportive effects of the automatic stabilisers. This is a different outcome to the 2014-15 budget.
  • Weaker nominal GDP growth, from weaker commodity prices and wages growth and slower wages growth, has reduced revenues by $52bn compared the 2014-15 budget. The government is not taking as much money out of the economy (and from businesses) as it expected – this is the automatic stabilisers in the budget at work. Whilst this is a cyclical challenge for the budget bottom line, it’s actually supportive for the economy.
  • Above and beyond the discretionary policy changes in the budget is the impact on confidence. The hit to confidence from the 2014-15 budget saw a retrenchment in consumer spending, and was a contributor to the ‘capex cliff’ as weaker demand dampened non-mining investment signals. The discretionary policy changes in the 2015-16 budget are expansionary, and should also be supportive of confidence. The shift in spending from the expanded paid parental leave scheme, which the Productivity Commission consistently found would deliver no participation benefits, to fund the child care package should deliver a benefit to the economy over time.

The economic outlook

  • Treasury expects the economy to grow at a subdued pace in 2014-15, gradually rising to above 3% growth by 2016-17. This is consistent with the unemployment rate peaking at 6½% in 2015-16.
  • Treasury highlights that non-mining investment is taking longer than expected to recover, resulting in a downward revision to 2015-16 growth expectations. However, the projections anticipate a recovery in this area to drive 2016-17 growth.
  • CPI has been contained at 1.3% over the past year by low oil prices, moderate wage growth and domestic activity. Inflation is expected to remain around the middle of the RBA’s target band through the year to 2015-16 as depreciation in the exchange rate flows through prices.
  • Growth, particularly nominal GDP, projections are highly sensitive to fluctuations in commodity prices through the impact on terms of trade. Treasury’s updated sensitivity analysis to iron ore prices indicates that a US$10 per tonne reduction/increase results in just over a 3 per cent fall/rise in the terms of trade, a 0.8% reduction in nominal GDP and a $2.1bn revenue hit in 2015-16.
  • Treasury is forecasting that weaker commodity prices will drive a fall in the terms of trade by 8½% in 2015-16. From 2016-17 the terms of trade is expected to remain broadly flat assuming a modest recovery in some commodity prices and a waning currency impact on import prices.

General disclosure: This research has been issued by Macquarie Securities (Australia) Limited (ABN 58 002 832 126, AFSL No. 238947) a Participant of the Australian Securities Exchange (ASX) and Chi-X Australia Pty Limited.

Halle Yilmaz is a financial adviser and business consultant. As a financial adviser, she gives solid advice that can create rapid and lasting results for her clients. Sign up for her free E-Book and download “7 Steps to Healthy Wealth Management.” Follow Halle on Twitter @halleyilmaz