With the election now announced, the budget announcements, Labor's response and proposed tax and superannuation changes take on greater weight.
Back in the black
Big tax cuts were last year’s headlines, but the reality was that these were largely pushed out into later years. This year’s headline is Infrastructure.
“Back in the black” was the government’s budget theme highlighting the surplus provision for 2020.
The forecast relies on economic growth increasing from 2.25% in 2019 to 2.75% in 2020, which is optimistic but ignores the 2019 anticipated deficit.
The reality which dampens this trend is the continuing uncertainty around the looming election result with a Liberal loss producing a legacy of 6 years without surplus.
Personal tax cuts
Last year’s budget was always going to be a hard act to follow given its sweeping and long-term statements. This year’s budget involved minor sweeteners and more immediate relief with rebates for lower income earners.
A key measure is the so-called $500 additional rebate which the Labor party says it will match. Achieved via the Low and Middle Income Tax Offset (LMITO), it’s expected to cost an additional $5.7bn in 2019-20 and will mainly benefit individuals earning between $45,000 to $100,000, tapering off to zero benefit above $125,000. Additional changes will impact from 2023 increasing the 19% tax bracket to $45,000 p.a. and a $55 lift to the Low Income Tax Offset, increasing the taxable income on which tax starts to become payable for low income earners.
Another tax cut involves the removal of the $87,000 - $180,000 tax bracket from 2025. Currently taxed at 37%, it’s being replaced with 32.5% which will be further reduced to 30%. This reflects the desire to simplify the tax brackets and deal with bracket creep.
The highlight was the removal of the work test for 65 and 66 year old taxpayers from 1 July 2020 which appears to align with the age pension starting at 67 years, effective from 1 July 2023.
Of note also was the delayed start date of 1 July 2023 for the previously announced “opt in” framework for insurance arrangements for members under 25 with accounts under $6,000.
Possibly the most significant tax saving measure is the extension of the instant asset write-off.
SBE’s (i.e. those with turnover up to $10m) have been able to write off assets up to $20k since 1 July 2018 with the threshold increased to $25K from 29 January 2019. Now assets acquired after 2 April 2019 up to $30k are eligible, and significantly, eligibility now includes companies with a turnover up to $50m.
ABN rules have tightened with new requirements directing yearly verification and potential cancellations for non-compliant tax lodgements.
Over three years, an extra $60m has been allocated to The Export Marketing and Development Grant providing cost assistance for marketing activity overseas. On a first-in first served basis, this won’t have significant impact to those already claiming.
For many years now, Division 7A which applies to company loans has been slated for change. Treasury released a consultation paper in October 2018 outlining proposed changes. Given the changes were largely detrimental to taxpayers, the deferred start date of 1 July 2020 has been welcomed.
Primary producers and tourism operators get a modest benefit from Luxury Car Tax refunds increasing from a maximum of $3,000 to $10,000 and the extension to cars other than 4-wheel drive.
Additional funding for the ATO of $1bn over 4 years was announced with additional revenue collected of over $4bn over that period. With some viewing the projected revenue increase with scepticism, taxpayers should be alert to increased audit activity.
Without doubt, Infrastructure is the big-ticket item with $25bn in spending announcements, on top of $75m already announced over the next 10 years. Some of these were specifically included in the budget, some will be saved for closer to the election.
Announcements include a $3.5bn “Climate Solutions” package, $3bn increase to the Urban Congestion Fund, $3.5bn for the Western Sydney North South Rail Link, $2.2bn to improve local road safety, $1.6bn for the M1 extension to Raymond Terrace and $2bn for a Melbourne to Geelong fast rail, pending the Victorian government matching the spend.
An “energy supplement” has been announced for pensioners ($75 for single pensioners and $125 for couples), which was extended the day after the budget to Newstart recipients. On health, $1.3bn is aimed at upgrading the health and hospital system with $736m to aid with mental health and more medicines added to PBS, as recommended by independent experts.
Labor party promises
As expected, the Labor Party have largely matched the budget’s tax cuts.
Those earning under $40,000 will get an additional $100 tax cut on top of the $255 offered by the Liberals. For those between $40,000 and $120,000 the two packages are broadly the same (with only minor benefits for those between $40 and $45k). For those over $120,000, Labor offers no benefit compared with the Liberal offering of $135.
Importantly, the longer term proposed tax cuts won’t be implemented.
This means removing the promised tax cuts of up to $11,640 a year for those on $200,000 as Labor insists that someone on $40,000 should not pay the same tax as someone on $200,000. In response, the Treasurer has stressed that this ignores average tax rates given someone on $200,000 would pay 10 times as much tax as someone on $45,000.
On spending, a $2.3bn package will reduce costs for cancer patients and education will receive an extra $14bn over 10 years.
Also proposed is a $2,000 payment for solar battery storage installation. This aligns with the “green” approach taken by Labor including the more infamous target on electric car sales of 50% by 2030.
Labor’s proposals for superannuation and tax
Should there be a change in government on 18 May 2019, there will be considerable superannuation and tax changes that are likely to have a wide ranging impact.
Some of the proposed changes to our superannuation and tax system are as follows:
Cash refunds of franking credits
Labor proposes to deny cash refunds of franking credits from 1 July 2019. This would largely impact individuals and self-managed superannuation funds.
Amongst some of their other proposed changes is reducing the capital gains tax discount from 50% to 25% from 1 July 2019 for all new assets that are acquired after this date and held for 12 months.
This policy is not expected to affect investments made by superannuation funds, small business assets or to investments made before this date.
Taxation of trusts
With a tag line of a ‘fairer tax system for all Australians’ Labor has announced that they would introduce a standard minimum 30% tax rate for discretionary trust distributions with testamentary trusts being excluded from this measure.
This policy has been widely criticised given the ease to circumventing.
Limit negative gearing
Under the banner of housing affordability, Labor is proposing limiting the use of net rental losses being deducted from wage income from 1 January 2020 to newly constructed housing. It is also proposed that existing arrangements would be grandfathered.
Division 293 threshold
The threshold at which individuals pay additional contributions tax is expected to be lowered from $250,000 to $200,000.
Non-concessional contributions cap
Labor is proposing to lower the annual non concessional contributions cap from $100,000 to $75,000.
The current superannuation guarantee charge rate is 9.5%. Labor is proposing to increase this to 12% sooner rather the current gradual increase where the 12% is expected from 1 July 2025.
With polling currently pointing to a Labor election win, it’s probably the budget reply speech and the proposed tax changes we should be paying attention to more than the budget itself.
However, it may prove difficult for Labor to introduce changes with a 1 July 2019 date and until law, should not be relied on.
If you have any questions please contact our tax specialist Michael Bode at firstname.lastname@example.org or your principal adviser.