Changes to University Funding
Working towards a more sustainable higher education section the Government has proposed several measures including:
- a 2.5 % efficiency dividend will be applied to universities for the next two years.
- an increase in university student fees to 7.5 % by 2021
- university graduates will start repaying their loans when they reach an income level of $42,000 a year, down from $55,000. $42,000 level of income will have a 1% repayment rate and a maximum threshold of $119,882 with a 10% repayment rate.
Higher education is already heavily subsidised. These measures are aimed at seeing student contribute more towards their own education and to make sure that the debts are paid back. About 21.8% of new loans taken out in a year is unlikely to ever be paid back because the borrower either earns below the taxable income threshold or has moved overseas. Decreasing the thresholds is one strategy aimed at making those who benefit from the education pay back what they owe to the tax payer.
Gonski 2.0 Funding
Changes to how schools are funded was a key part of the budget announcement. Canberra will spend $17.5 billion on schools this year, with increases every year for 10 years. This will mean a rise to $22.1 billion in 2021 and $30.6 billion in 2027. Compared to the 2016 budget, this is an increase of $18.6 billion over the next 10 years.
The Government has proposed $75 billion in infrastructure funding and financing over the next 10 years. This is a significant allocation with Badgerys Creek (Sydney’s second airport) and an Inland Freight Rail Link being key projects.
Badgerys Creek – Sydney’s 2nd Airport
The highest profile infrastructure commitment is the $5.3 billion (debt funded) proposal to build the Sydney’s second airport at Badgerys Creek. The Government expects the airport to be delivered in 2026 and create an estimated 20,000 jobs by the early 2030s. The Sydney Airport Group decided not to take up the project citing “it would be too great of a financial risk for their investors”, so the Government decided to take full control of the project. However, with the private sector deeming the project too risky, it begs the question: is this project going to provide value for the tax payer dollar?
Inland Freight Rail Link
The Government has committed $8.4 billion to finance the Melbourne to Brisbane Inland Rail project through a combination of equity investment in the Australian Rail Track Corporation and a public private partnership for the most complex elements of the project.
The Inland Rail project will drive productivity, with freight only taking 24 hours between Melbourne and Brisbane, better connecting Australian products to domestic and international markets. The high-capacity freight link will run through regional Australia and will help reduce the number of trucks in our cities and regional roads. It is estimated that the project will generate thousands of jobs, with up to 16,000 direct and indirect jobs generated at the peak of construction. There are concerns however, with the profitability of the project. A 2015 economic analysis cautioned that “the expected operating revenue over 50 years will not cover the initial capital investment”, meaning taxpayers would have to subsidise the project. This explains why the private sector has been hesitant to take on the project without Government support.
First Home Super Saver Scheme
To save for a house deposit first-home buyers will be allowed to use voluntary super contributions. The scheme proposes the following:
- Contributions and earnings will be taxed at 15%, not marginal tax rates.
- Withdrawals will be taxed at marginal tax rate less a 30% tax offset.
- Contributions are limited to $30,000 per person in total and $15,000 per year.
- Both members of a couple can use this scheme
- Non-concessional contributions can also be made, but will not benefit from the tax concessions apart from the earning being taxed at 15%
This scheme has been introduced as a way of helping first-home buyers enter the market. It will be beneficial to many Australians trying to save for a house deposit while still having to pay rent. This scheme will not work in isolation. Other strategies the Government has proposed to help housing affordability, such as the states being required to deliver on housing supply targets and a $1 billion National Housing Infrastructure Facility, will aim at improving affordability and supply.
This is a positive measure. It will not only aid prospective home buyers in saving a deposit, but it will hopefully also encourage younger Australians to engage in their superannuation earlier and lessen the amount of default super accounts.
Travel Expenses for Residential Rental Property
From 1 July 2017, deductions for accommodation and travel related to inspecting, maintaining, or collecting rent for a residential property will not be allowed. This deduction was costing the budget heavily and, it could be argued, was being abused by the tax payer. Whilst this new proposal will not allow tax payers to deduct against their rental income for property inspections etc., it will not prevent them from using third parties (real estate agents etc.) and deducting the incurred expenses. This will only affect Australians with rental properties and should have limited impact on them. It may slightly reduce deductions at tax time.
Depreciation on Investment Properties
Deductions relating to the depreciation of “plant and equipment” (i.e. stoves and air conditioners) in residential properties will be limited to investors who pay for the equipment. This means that if the previous owner of a property purchased plant or equipment, subsequent owners cannot claim deductions for these items. Under this measure, the acquisition of existing plant and equipment items will be reflected in the cost base for CGT purposes for subsequent owners.
It is important to note that this does not apply to depreciation on building allowances.
Annual charge on foreign owners of underutilized residential property
To improve housing affordability and supply the Government has proposed tougher rules for foreign investment in residential real estate. The measure includes:
- denying foreign and temporary tax residents access to the capital gains tax (CGT) main residence exemption
- an annual levy of at least $5000 will apply to property where the property is not occupied or available for rent for at least six months per year
- increasing the CGT withholding rate for foreign tax residents from 10 per cent to 12.5 per cent
- reducing the CGT withholding threshold for foreign tax residents from $2 million to $750,000
In addition, it is proposed that developers will only be allowed to sell a maximum of 50% of new developments to foreign investors. These measures, aimed at increasing the cost of entry of foreign owners into the Australian property market, could indirectly help Australian owners, however $5000 a year is not a significant amount of money when you are talking about million dollar properties and may not be much of a deterrent.
Increasing the Medicare Levy Low-Income Thresholds
The Medicare levy low-income thresholds for singles, families and seniors and pensioners will be increased from the 2016-17 income year as follows:
- Singles – increased to $21,655
- Family – increased to $36,541 plus $3,356 for each dependent child or student
- For single seniors and pensioners – increased to $34,244
- For seniors and pensioners – increased to $47,670 plus $3,356 for each dependent child or student.
The Medicare levy will increase on 1 July 2019 by 0.5% to 2.5% of taxable income which the Government says is to help fund the $22 billion National Disability Insurance Scheme. This means that everyone will pay more tax. The table below shows how much extra tax each Australian will pay depending on their earnings.
Whilst there is an increase in the Medicare levy, the budget removes the freeze on the indexation of the Medicare Benefits Schedule and brings back bulk billing for diagnostic imaging and pathology services. It reinstates the Pensioner Concession Card for those pensioners who lost their pension after the changes to the pension assets test from 1 January 2017.
Allowing Non-Concessional Contributions for Those Over 65 Downsizing Their Family Home
Australians over the age of 65 will be able to make a one one-off non-concessional contribution into their superannuation fund from the proceeds of the sale of their principal home up to $300,000. This is another measure from the Government to help free up housing supply. To qualify, the home being sold must have been their main residence for at least the previous 10 years. If the house is owned jointly then each person will be able make up to $300,000 contribution.
This is a great policy for older Australians who want to downsize their home, however for those who want to age in their current home or those who are concerned about their age pension entitlements, this policy is not likely to persuade them to downsize and may have a limited impact on housing supply.
Child care affordability is an issue that affects many working families. The Government has proposed investing $37.3 billion in child care over four years. The measure will provide more support to families from 3 July 2018 through a means-tested subsidy. The subsidy will be payable to families with incomes below $350,000 per annum from 2 July 2018 and the upper income threshold will be indexed annually by CPI from 1 July 2018.
This policy will help approximately 1 million families with childcare and before and after school care and can help the economy by seeing mothers return to the work force. The Government will achieve close to $120 million in savings over three years from 2018-19 by better targeting the child care subsidy to families with incomes below the $350,000.
Energy Assistance Payment
This is a one-off payment to assist eligible recipients with energy costs. To be eligible, recipients must:
- be Australian residents
- be receiving one of the following payments:
- Age Pension
- Disability Support Pension, or
- Parenting Payment Single, and
- be receiving more than the nil rate of payment as at 20 June 2017.
The amount of the one-off payment will be $75.00 for single people, and $125 for couples. The One-off Energy Assistance Payment will be paid automatically to eligible recipients in the week commencing 26 June 2017. The payment is not taxable and will not be counted as income.
Liquid Assets Waiting Period
This measure will increase the maximum limits on liquid assets (cash on hand, bank accounts, shares or term deposits) and the Liquid Assets Waiting Period from 13 weeks to 26 weeks from 20 September 2018. Its aim is to increase self-reliance. The LAWP is the number of weeks a person is precluded from receiving Government income support and applies to the Newstart allowance, youth allowance, Austudy and sickness allowance.
The revised maximum LAWP apply if liquid assets reach the following thresholds:
Whilst this measure does increase the threshold of liquid assets available to claimants before the LAWP rules apply, a longer waiting period would mean it is more difficult for claimants to manage their cash flow in the meantime.
The Government announced a new Levy on the five biggest banks (with liabilities above $100 billion) as part of the budget. This measure, a 0.06 per cent levy, is estimated to raise over $6.2 billion, which would be used to reduce the deficit, and could also help make the banking sector more competitive. This scheme, which many are comparing to the failed mining tax, works at raising revenue and will assist with budget repair. However, it raises concern about sovereign risk (i.e. will this deter international markets from doing business with Australian businesses when the Government interferes by taxing different industries. Banking now and mining previously). Simply put if the Government has started to tax big earners, who will they do it to next? Another concern is that these costs will be passed on to the consumer. The Labor Party has announced it will support this measure.
Extending the immediate deductibility threshold for small businesses
Introduced by former Prime Minister Tony Abbot in the 2015-16 budget, this policy has been very popular and successful in assisting small business write off expenses up to $20,000 in the first year rather than over several years. The Government announced in the budget that small businesses with a turnover up to $10 million can write off expenditure up to $20,000 for a further year.
This deduction can be used for each asset that costs less than $20,000; new or second-hand. The deduction is claimed through tax returns in the year the asset was first used or installed ready for use. The current ‘lock out’ laws for simplified depreciation rules will continue to be suspended until 30 June 2018. This is a productive measure. It provides small business with increased tax offsets which may enable them to expand their business, fund additional super contributions or business insurance premiums.
The Government has reconfirmed its commitment to continue to cut the corporate tax rate from 27.50% for small business and 30.00% for large business to a flat tax rate of 25% over a ten-year plan. This is crucial to assist businesses in Australia to remain competitive with its overseas competitors. Legislation to support this measure passed Parliament on 9 May 2017.