2018 Federal Budget - Key Insights for Our Clients
The 2018 Federal Budget clearly precedes an election.
Key winners are taxpayers on lower income tax brackets, older Australians and small business. We’ve sifted through the Budget and market commentary to draw out the key points that may impact our client’s lifestyle and financial strategies.
Overview
Deficit for this financial year is projected at $18.2 billion, falling to $14.5 billion in 2018-19 and returning to surplus within three years
Higher than expected tax receipts, together with a crackdown on the black economy and multinationals to fund tax cuts
Those tax cuts amount to $140 billion over a decade and will be made in a three-phased approach (about $10 a week for middle income earners). See below for more.
Income Tax
Income tax cuts through a combination of tax rate threshold changes and tax offsets in 3 stages over 7 years:
Step 1 – immediate relief for low and middle income earners by way of a tax offset that will deliver a maximum $530 per year benefit to taxpayers earning between $48,000 and $90,000. Other taxpayers will receive partial offsets.
Step 2 – to address bracket creep, thresholds will be adjusted (see table below)
Step 3 – from 1 July 2024, anyone earning between $41,000 and $200,000 will have the same marginal tax rate of 32.5%. Bracket changes over 7 years are shown below:
Medicare Levy – was to increase from 2.0% to 2.5% from 1 July 2019 but now removed.
Circular Trust Distributions – this has always been an area of contention amongst the few accountants who practice this approach. It involves a trust distributing income to a corporate beneficiary that eventually finds its way back into the trust – like a ‘round robin’ – and can reduce overall tax. Going forward such practices will attract the top personal tax rate plus the Medicare levy, effectively ending the practice.
Superannuation
The Government can’t leave superannuation alone, but announced changes are actually positive.
SMSF Members – the maximum number of members for a self-managed fund will increase from 4 to 6.
Annual Audits – the annual audit requirement for SMSFs will change to a 3 yearly requirement for SMSFs with a history of good record keeping and compliance. This measure will start on 1 July 2019 pending industry consultation.
Work Test Exemption – people aged 64-75 no longer need to meet the Work Test (i.e. working 40 hours within 30 consecutive days) to make voluntary contributions to super in the first financial year they do not meet the Work Test. This will apply from 1 July 2019 to people with superannuation balances below $300,000.
Employer SGC contributions - From 1 July 2018, the Government will allow individuals with multiple employers and whose income exceeds $263,157 to nominate that their wages from certain employers are not subject to the compulsory Superannuation Guarantee (SG) contributions. The employee could negotiate to receive additional income instead of the SG contributions from their employer.
Retirement Income Covenant - the Government is introducing a ‘retirement income covenant’, requiring super fund trustees to offer a Comprehensive Income Product for Retirement (CIPR) that provides income for life to a member, no matter how long they live. The Government will release a position paper for consultation shortly. We will stay across this issue as it has applicability to some of our clients.
Older Australians
Aged care access - The Government will provide an additional 14,000 new high level home care packages over four years from 2018-19 in addition to the 6,000 high level packages delivered in the 2017-18 Mid-Year Economic and Fiscal Outlook. The additional home care packages will be complemented by the release of a further 13,500 residential aged care places and 775 short term restorative care places in the 2018-19 Aged Care Approvals Round.
Providing better quality of aged care - The Government will establish a new Aged Care Quality and Safety Commission from 1 January 2019 which will combine 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.
Expanding the Pension Loan Scheme - From 1 July 2019, the Government will expand eligibility to the Pension Loan Scheme to include all Australians of Age Pension age. The Government will also increase the loan amount so that an individual can receive a fortnightly amount up to 150% of the maximum Age Pension rate.
Currently part-pensioners and some self-funded retirees who own a property in Australia can access the non-taxable Pension Loan Scheme. It is available to those who are not entitled to the maximum rate of pension, or any pension, because of the Income Test or Assets Test (but not if they are ineligible under both tests). Under the scheme, individuals who are Age Pension age can obtain a loan (secured against the individual’s property) to increase their fortnightly pension payment from a part-rate or nil rate, up to the maximum pension rate.
Business
Company Tax Rate - The Federal Government confirmed its commitment to gradually cut the company tax rate for all companies to 25% by 2026-27 under a phased approach. Smaller entities currently benefit from the 27.5% rate while the phasing in of the lower 27.5% corporate tax rate to other corporate tax entities with aggregated turnover of $50 million or more would start from the 2019-20 income year - if legislation can get through the Senate.
Instant asset write-off extended - The immediate write-off of depreciable assets costing less than $20,000 purchased by small business entities (with an aggregated turnover of less than $10m) was due to expire on 30 June 2018. The concession has been extended for a further 12 months to 30 June 2019.
Division 7A UPE rule strengthened – UPEs (Unpaid Present Entitlements) arise where a related private company is entitled to a share of trust income as a beneficiary, but has not been paid that amount (i.e. cash payment has not been made). Division 7A is an integrity rule that requires both cash and non-cash benefits provided by private companies to related taxpayers to be taxed as dividends unless structured as Division 7A complying loans.
From 1 July 2019, UPEs will fall within the scope of Division 7A rather than the current concessional treatment allowed under the ATO’s practice statements. This concessional treatment defers the payment of UPE itself to the end of the term of the agreement, rather than an annual repayment obligation that is required under Division 7A. Annual interest repayments are required under both arrangements. Where UPEs have not been paid due to the funds being re-invested in income generating assets or businesses, this change is likely to have a real cash flow impact due to the change in timing of principal repayments.
Cash payments - The Government will introduce a limit of $10,000 for cash payments for goods and services from 1 July 2019. This will not apply to transactions with financial institutions or consumer to consumer non-business transactions. This measure is intended to reduce undocumented cash payments used to avoid tax or money laundering from criminal activity.
Estate Planning
Testamentary Trusts - Minors who receive income from testamentary trusts are taxed at normal adult rates, as opposed to the higher tax rates that usually apply to minors. From 1 July 2019, the concessional tax rates will only apply to income derived from the assets that were transferred from the deceased estate or the proceeds from the disposal or investment of those assets. This measure is designed to stop people injecting other investments (not related to the deceased estate in any way) into the testamentary trust and obtaining the concessional tax rates when distributing to minors. Note – if you have a testamentary trust in your Will, there is no need to make any changes, as this change only applies to the operation of the trust post your passing.
Company Directors
Reforms to combat illegal phoenixing include new phoenix offences; preventing directors improperly backdating resignations to avoid liability; limiting the ability of directors to resign if this would leave the company with no directors; and extending the Director Penalty Regime making directors personally liable for company debts in some circumstances.
As a response to the Black Economy Taskforce, the Government will consult on a "rigorous" new director identification numbers (DINs), as part of reforming the Australian Business Name (ABN) system. The Australian Institute of Company Directors supports DINs as an anti-phoenixing measure, and argues that they should assist in removing director personal information from the public domain.