Framed in the context of an unexpected boom in tax income – and with an election on the horizon - this year’s Federal Budget highlight is a range of tax cuts that benefit all Australians – but not all to the same extent and at the same time.
All taxpayers, however, do benefit from something that didn’t happen – the government will not proceed with last year's intention to lift the Medicare levy by half a percentage point.
Perpetual’s analysis looks at measures that will have the biggest impact on Australians’ financial planning for the future. In the spotlight is superannuation, changes to the Pension Loans Scheme and more initiatives focused on older Australians.
It is important to remember this material relates to proposals which have not yet been legislated, and our analysis contained here should be viewed in that context. We recommend you do not take any specific action until the Government provides greater detail in relevant draft legislation.
Bracket creep – paying more tax as income increases push you above a higher tax threshold - is a significant feature of the Australian tax system. This year’s tax changes seek to address some of these issues. Indeed, looking forward seven years, it removes the 37cents tax bracket altogether.
More immediately there will be an increase to the upper income threshold of the 32.5% personal income tax bracket, such that it will rise from $87,000 to $90,000 from 1 July 2018. This will give back some tax to those earning over $90,000 a year and delay the moment at which many other taxpayers move into the 37c bracket.
Tax relief for low to middle income earners
With benefits for up to ten million taxpayers, the government has sought to provide more immediate relief for low and middle-income taxpayers. This comes in the form of the ‘Low and Middle-Income Tax Offset’ (LMITO), from 1July 2018.
This represents an amount of up to $530 per year which will be received as a lump sum following the lodgement of an eligible tax return. This offset operates in addition to the existing Low-Income Tax Offset (LITO).
The Medicare levy will be maintained at the current rate of 2% on the basis that the NDIS can be funded using already budgeted-for expenditure.
Additionally, it has been clarified that the Medicare levy low income threshold will continue to move in line with CPI.
Families who use testamentary trusts for tax planning may need to seek advice as the Budget announces a change the treatment of income payed to minors.
Currently income derived by a minor as a beneficiary of at testamentary trust is taxed at adult marginal rates rather than the punitive rates that usually apply to income for minors. The Government believes this has given a minority of taxpayers an incentive to inappropriately utilise such trusts for taxation purposes.
Effective from 1 July 2019, concessional rates of tax for testamentary trusts will only apply in respect of income derived from the assets of a deceased, or from the reinvestments of the proceeds of disposal of assets of a deceased.
Recent Budgets have made keeping within superannuation contribution limits more important. To reduce the impact of “accidental” excess contributions, from 1 July 2018, individuals with multiple employers and whose income is greater than $263,157 can cherry-pick the employers for whom Superannuation Guarantee (SG) will not apply.
How does it work?
- This will assist individuals to avoid inadvertent breaches of the $25,000 concessional contributions cap due to multiple contributions being received from several sources. This alleviates the worry of being faced with ‘excess concessional contributions charge’ and shortfall interest charge.
- Individuals who are affected by this measure may want to discuss with their employer ways to manage this change whilst ensuring their remuneration is maintained.
Greater flexibility for self-managed and small APRA superannuation funds
Currently, superannuation law permits a self-managed superannuation fund (SMSF) and a small APRA fund (SAF) to have ‘up to four members’. While these rules may have been suitable for times gone by, the modern trend towards more fluid family dynamics now mean flexibility is an important consideration within this area of superannuation policy. From 1 July 2019, the allowable member number in both new and established funds will rise to six.
Additionally, a ‘retirement covenant’ will be added to existing superannuation law that will require fund trustees to formulate an appropriate retirement income strategy for its members.
How does it work?
- This change increases the ability to use superannuation as a tax vehicle across a wider family unit. It may be particularly beneficial for families who have more individuals in the pre-retirement phase focusing on building their wealth.
- Being able to add new fund members within an SMSF or a SAF may also be advantageous for a fund seeking to retain complying status in the event of one (or more) of the members relocating offshore. The ability to add up to two extra fund members will likely assist funds with meeting the ‘active member test’.
- Individuals with SMSFs should consider revisiting their existing fund deed to be sure it meets these new requirements, especially requirements concerning the ‘retirement covenant’.
Protecting superannuation accounts from erosion
To reduce the impact of fees on those with small super balances, from 1 July 2019, an annual 3% cap will apply on passive fees charged to superannuation fund members with account balances less than $6,000.
Additionally, inactive superannuation accounts with balances below $6,000 will be referred to the ATO, who will use their data-matching powers to locate an active account for that same member, so the balances can be consolidated. Finally, exit fees will be abolished for all superannuation accounts.
Changes to insurance within superannuation
From 1 July 2019, new measures will be legislated to protect the superannuation savings of many Australians from undue reduction arising from the payment of insurance premiums.
Insurance within superannuation will now operate on an ‘opt-in’ basis for: those with balances less than $6,000, members under age 25 and/or those whose accounts have not received a contribution in 13 months and are therefore considered ‘inactive’. A 14-month decision period will apply to allow affected members time to choose to ‘opt-in’ and keep their existing cover, or have it cancelled.
Enhanced integrity measures for those seeking to claim a deduction for their superannuation contribution
From 1 July 2018, additional compliance measures will be implemented to ensure that ‘notice of intent’ processes are appropriately followed by superannuation fund members. This will give the ATO greater ability to deny deductions to individuals who do not meet the prescribed requirements.
Currently, the trustee of a superannuation fund can only accept member contributions and voluntary employer contributions, made by or on behalf of members aged between 65 and 74, if the member was gainfully employed (which the government classifies as “employed or self-employed for gain or reward in any business, trade, profession, vocation, calling, occupation or employment”), for a least 40 hours within 30 consecutive days during the year in which the contribution is made.
From 1 July 2019, the Government proposes to introduce an exemption to the work test for individuals with superannuation balances less than $300,000. In the first year they do not need to meet the work test requirements outlined above.
Increase to the Pension Work Bonus to support older Australians remaining in the workforce
From 1 July 2019, the Government proposes to increase the Pension Work Bonus to $300 per fortnight.
The Pension Work Bonus increases the amount an eligible pensioner can earn from employment before it affects their pension entitlement.
Currently, the first $250 of fortnightly employment income is not assessed under the pension income test. If an individual earns less than $250 a fortnight, the unused bonus accrues in a Work Bonus ‘income bank’ capped at $6,500, which can be carried forward to offset future employment income that would otherwise have been assessed under the pension income test. Currently, income from self-employment is not treated as ‘employment income’.
Under the Government’s proposal, the fortnightly Work Bonus concession will increase to the first $300 of employment income, and any unused amount will accrue up to a maximum of $7,800. Income from self-employment will be included in ‘employment income’.
Changes to the Pension Loans Scheme to help retirees boost their retirement income
From 1 July 2019, the Government proposes to expand the Pension Loans Scheme to everyone over Age Pension age and increase the fortnightly income stream to 150% of the Age Pension rate.
The Pension Loan Scheme is available to part-pensioners or individuals not entitled to the Age Pension due to either the income or assets test (but not both) and who have equity in their home. It is not available to individuals receiving the full Age Pension.
Protecting older Australians
The Budget introduced a range of initiatives focused on vulnerable older Australians:
- from 1 July 2018, the Government is combining the residential care and home care programs to allow older Australians more options to stay at home longer, as well as remain healthy and independent.
- from 1 January 2019 the Aged Care Quality and Safety Commission will be established as integrity measure whose remit will be to protect the interests of older Australians seeking care
- a new integrated carer support model is proposed that covers a range of early intervention and preventative services for carers. An income test threshold of $250,000 will be introduced for the carers allowance to fund these measures.
- a new national register of Enduring Powers of Attorney will be established and there will be both evaluation and expansion of specialist support services for ‘elder abuse’ units.