The government released the 2018-19 Federal Budget on Tuesday 8 May. The Budget, touted as being an election vote sweetener, focused on providing tax relief to middle and low-income earners, changes to superannuation and increasing funds available to pensioners. The Budget is set to return to surplus a year earlier than expected in 2019-20. Treasurer Scott Morrison said the economy had ‘strengthened’ since the last surplus forecast which has enabled the tax reductions. Following are details of the Budget and how they may affect you and your superannuation.
Personal Tax Cuts
In what could be called a radical idea, the government proposes eliminating the middle income tax bracket of 37% by 2024. The implementation of this legislation will run over the next seven years, so it remains to be seen if it endures two elections. The “tax package” the government proposes is a three-phase plan:
Starting 1 July 2018, the upper threshold of the 32.5% income tax bracket will increase from $87,000 to $90,000. People earning up to $37,000 will receive a low and middle income tax offset of up to $200. This offset increases for people earning over $37,000 up to $48,000, by 3 cents per dollar up to a maximum offset of $530 and those earning over $48,000 up to $90,000 will receive the maximum offset of $530. People earning over $90,000 but less than $125,333 will receive an offset that reduces to nil on a sliding scale. This offset scheme will end by 30 June 2022. Entitlement to the low and middle income tax offset is in addition to the existing low-income tax offset.
From 1 July 2022 tax payers will receive a second round of tax cuts raising the low-income tax offset (LITO) from $445 p.a. to $645 p.a. and the 19% tax threshold and 32.5% tax threshold will be increased to $41,000 and $120,000 respectively.
Finally, from 1 July 2024 the 37% marginal tax rate will be abolished, and the 32.5% tax threshold will be increased to $200,000. Under the proposal, the final income tax brackets will look like this:
This plan will see more money in the pockets of middle to low income earners and is a positive move for Australians. However, some would question the fairness of a person earning $41,000 being taxed at the same rate as someone earning $200,000. Scott Morrison insists the entire tax package needs to be legislated together, so time will tell if this package survives.
The government has abandoned its 2017-18 Federal Budget proposal to increase the Medicare Levy from 2% to 2.5% from 1 July 2019 to help fund the cost of the National Disability Insurance Scheme. This was estimated to cost a family earning $120,000 an additional $600 per year.
Small Business Accelerated Depreciation Extended
Small businesses, with an annual turnover of less than $10 million will continue to be able to immediately deduct eligible assets (costing less than $20,000) installed or first used by 30 June 2019. This is a 12-month extension of the current deduction scheme. After 1 July 2019 the threshold for immediate deductions of assets will revert to $1,000. Small businesses may want to consider purchasing eligible assets within the next two financial years to take advantage of this scheme.
Superannuation received much attention in this budget. A series of legislative reforms from 1 July 2019 were put forward including:
- No work test for members aged 65 to 74, whose total super balance is less than $300,000 to make contributions to super in the first year after they stop working. This means that those who cease work in the 2018-19 and future financial years may be eligible to make additional contributions into their superannuation.
- Exit fees will be abolished on all super accounts. This is a great policy as it will enable Australians to change super funds more easily and find the super fund that works well for them without being penalised.
- A 3% cap on administration and investment fees for accounts with less than $6,000 and inactive accounts under $6,000 will be transferred to the Australian Taxation Office (ATO) to be consolidated with the member’s active account. These reforms will help preserve the funds of those Australians with low account balances and give them an opportunity to re-engage with lost super.
- Opt-in insurance for those under 25 or if there is less than $6,000 in the super account. Whilst this policy has the intention of reducing the erosion of super accounts by insurance premiums and/or duplicate insurance cover, it has the potential to do more harm than good. It runs the risk of young people being uninsured for total and permanent disability (TPD). Affected members will have 14 months to decide if they want to opt-in to their existing cover or allow it to cease.
- SMSF members can increase from four to six and those with a good track record can move from annual to three-yearly audits. SMSFs and small APRA funds will be able to increase their members to a maximum of six. This will provide greater flexibility for larger families to manage their superannuation together.
Work Bonus Increase
In a move that is set to benefit more than 88,000 pensioners, the government has proposed increasing the Work Bonus from $250 to $300 per fortnight and allowing the accrual of up to $7,800 in their employment income concession bank. This means from 1 July 2019 the first $300 of income from work each fortnight will not count towards the pension income test. The Work Bonus will also be extended to self-employed individuals. This reform will see more money in the pockets of pensioners who still want or need to work.
Expansion of the Pension Loan Scheme
From 1 July 2019 the government proposes to extend eligibility for the Pension Loans Scheme (PLS), which enables eligible individuals to unlock equity in their home, to all Australians over age pension age and to increase the maximum fortnightly income stream to 150% of the age pension rate. Currently eligible individuals can receive up to 100% of the age pension. Full age pensioners will be able to increase their income by up to $11,799 for singles and $17,787 for couples per year. This proposal may enable eligible pensioners to increase their cashflow through utilising the equity in their homes.
This Budget proposes some positive movements in superannuation and taxation. There is a focus on increasing available funds to middle to low income earners, self-funded retirees, and pensioners. The above proposals still need to successfully pass through Parliament before becoming law and may be subject to change during this process. The taxation package in particular will need to survive two elections, so whilst tax cuts sound great – it remains to be seen if they come the fruition.
This information is a summary of Elliot Watson Financial Planning Pty Ltd’s understanding of the proposed Federal Budget 2018/19 changes announced on 8 May 2018. The changes are subject to the passing of legislation and, accordingly, may not become law or may change.
The views expressed in this publication are solely those of the author; they are not reflective or indicative of RI Advice Group Pty Ltd’s position, and are not to be attributed to Ri Advice Group Pty Ltd. They cannot be reproduced in any form without the express written consent of the author”.
Elliot Watson Financial Planning Pty Ltd is a Corporate Authorised Representative and its advisers are Authorised Representatives of RI Advice Group Pty Ltd, ABN 23 001 774 AFSL 238429.
The information (including taxation) in this article does not consider your personal circumstances and is of a general nature only – unless otherwise stated. You should not act on the information provided without first obtaining professional advice specific to your circumstances and considering a Product Disclosure Statement.