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Budget 2019

Posted on April 3, 2019 by GeersSullivan

Paving the way to an election

Treasurer Josh Frydenberg has delivered a ‘back in the black’ Budget aimed squarely at voters, stressing the Morrison Government’s commitment to financial discipline and low taxes.

As expected, the Treasurer signaled sweeping tax cuts and major infrastructure spending if the Coalition wins the upcoming federal election widely expected to be held in May.

This largesse is made possible as the Budget heads towards surplus for the first time in 12 years. Extra revenue has flowed into the Government’s coffers from a surge in company tax on the back of higher commodity prices, and a higher personal tax take as more Australians find work.

The Big Picture

The Federal Budget is all but balanced. The Government expects a small underlying Budget deficit of $4.2 billion this financial year, unchanged since the mid-year Budget update in December, before moving to a $7.1 billion surplus in 2019-20.

The Budget’s big spending promises come despite a worsening economic outlook over the past six months. The Treasurer forecast growth of 2.25 per cent this year rising to 2.75 per cent in 2019-20 and 2020-21, slightly lower than the 3 per cent forecast in the mid-year update.

Growth could also suffer from a cut in the permanent migrant intake from 190,000 to 160,000 a year. The Government predicts current net debt of $370 billion will fall to 18 per cent of GDP in 2019-20 and be wiped out in 10 years.

Bigger tax cuts

The centerpiece of the Budget is an extension of the already announced multi-year tax package. Low and middle-income workers will receive immediate income tax relief of up to $1,080 for single income families and up to $2,160 for dual income families from 2018-19.

By 2024-25, 94 per cent of taxpayers on incomes below $200,000 will pay no more than 30c tax in the dollar. Incomes above $200,000 will pay 45c in the dollar.

The Low and Middle Income Tax Offset (LMITO) will almost double from $530 to a maximum of $1,080 a year for people earning between $48,000 and $90,000, to be received after people submit their 2018-19 tax return. People on income below $37,000 will receive an offset of up to $255.

The popular instant asset write-off for small business has been increased from $25,000 to $30,000 a year, extended to businesses with turnover up to $50 million (previously $10 million) and will apply as of 2 April 2019. This allows small and medium size businesses to deduct the cost of assets such as cars and equipment.

Major infrastructure spending

The Government’s other signature spending initiative is a $100 billion boost to infrastructure spending over the next decade, an increase of about one third on last year’s Budget.

This includes $2 billion for a fast rail link from Melbourne to Geelong. The Government will also co-fund five business cases with state governments for fast rail from Sydney to Wollongong, Sydney to Parkes (via Bathurst and Orange), Melbourne to Albury Wodonga, Melbourne to Traralgon, and Brisbane to the Gold Coast and will build on projects already underway.

There is also a $3 billion increase (to $4 billion) in the Urban Congestion Fund, including $500 million for a commuter carpark fund.

A further $1 billion will be invested to improve the Princes Highway in NSW, Victoria and South Australia, with additional funding for road and rail projects in all states and territories.

Beefed up regulation and compliance

In the wake of the Banking Royal Commission, financial regulators Australian Securities and Investments Commission (ASIC) and Australian Prudential Regulation Authority (APRA) will be given a boost of more than $550 million to clamp down on misconduct.

The Australian Taxation Office will be given extra funds to crack down on welfare cheats and tax dodging.

Healthcare and welfare

The Government has pledged $527.9 million for a Royal Commission into the abuse of people with disabilities. It has also recommitted to fully funding the National Disability Insurance Scheme, but a slow take-up of the NDIS has delivered a $1.6 billion saving to the Budget’s bottom line and contributed to the projected Budget surplus.

In response to the national crisis in mental health and youth suicide, $461.1 million will go to prevention and treatment programs.

The creation of a new $337.2 million drug strategy to address harmful opioid use, improve family support services and increase capacity of drug and alcohol services in remote and regional areas.

The cashless welfare card will be extended to all the Northern Territory and Cape York communities in Queensland at a cost of $129 million.

Aged care services will receive a further boost of $282.4 million to fund 10,000 new home care packages and increasing home care supplements for dementia and cognition.

Superannuation sweetener

In a bid to help older Australians boost their retirement savings, the Government intends allowing 65 and 66-year-olds to make voluntary contributions to their super from 2020-21 without meeting the work test.

The same group will also be allowed to make three years’ voluntary non-concessional (after tax) contributions, currently capped at $100,000 a year, in one year.

Education

There are no big-ticket announcements for schools or universities, but $453 million will go to extend pre-school education in the year before school.

The focus instead is on a new $525.3 million skills package to provide vocational education and training that will fund 80,000 new apprenticeships and double incentives to employers to $8,000 per placement.

Training hubs will be established in 10 regional areas with high youth unemployment.

Environment and energy

The Government hopes to shore up its climate and energy credentials with $3.5 billion for a new Climate Solutions Package, including $2 billion for the Climate Solutions Fund (previously called the Emissions Reduction Fund).

Pensioners, carers and veterans will receive a one-off cash payment to help with energy bills. The Energy Assistance Payment is worth $75 for singles and $125 for couples.

It has also previously announced $1.4 billion for Snowy Hydro 2.0 and a $56 million Battery of the Nation in Tasmania.

Regional communities will receive $6.3 billion in drought support and $3.3 billion in flood support. A $3.9 billion Emergency Response Fund will be set up to help with future natural disaster efforts.

National security

There will be a continued focus on national security, with $512.8 million for the Australian Federal Police and $58.6 million to the Australian Security Intelligence Organisation.

The Government will also spend $34.8 million over four years to counter foreign interference.

Looking ahead

This is an unusual Budget as there will be little chance of legislating most of the spending measures before a federal election in May.

The biggest risk to the Budget forecasts for growth is the falling property market and concerns that it could flow through to the broader economy. According to CoreLogic, national house prices are down 7.4 per cent since their 2017 high, with most pundits predicting further falls this year.

Monetary support could come from the Reserve Bank which announced yesterday the official cash rate will remain on hold at a record low of 1.5 per cent while also signaling it is prepared to cut rates this year to support growth if needed.

For its part, the Government’s proposed tax cuts and other stimulus measures could provide the kick the economy needs to get people spending, companies hiring and flat wages rising.

Labor has flagged it will deliver its own economic statement later this year if elected. We will have to wait until after the election to see whose policies will take Australia forwards.

It is important to note that the policies outlined in this publication are yet to be passed as legislation and therefore may be subject to change.

Taxation of Superannuation Funds

Posted on March 22, 2019 by Piera-Lee Ramm

The following information provides an overview of the basics of taxation applicable to Self Managed Superannuation Funds (SMSF). Superannuation funds are essentially subject to the same taxation principles as any other taxpayer, however they receive concessions such as a reduced tax rate, in return for complying with the superannuation laws.

Taxable Income

A complying superfund is subject to a maximum concessional tax rate of 15% on its taxable income.  The tax rate is reduced further for pension accounts and capital gains is reduced to 10% for investments held over 12 months – further information is provided below.

The taxable income of a SMSF is based on total assessable income less any allowable deductions. The most common types of assessable income for complying SMSFs are concessional contributions (such as employer and personal concessional contributions), net realised capital gains and investment income such as bank or term deposit interest, dividends, distributions and rent from properties.

Any tax payable can be reduced by way of relevant rebates such as imputation credits – currently, complying SMSFs can take full advantage of any franking credits in respect of Australian dividends despite having a concessional tax rate.

An SMSF which is found to be non-complying will incur tax at the highest marginal tax rate (45% plus Medicare Levy).

Special rules apply for capital gains and special income.

Capital gains

A capital gain arising from the disposal of a superfund’s asset will form part of the fund’s taxable income and will be subject to tax at 15%. Where the fund has held the asset for more than 12 months, it will receive a CGT discount of one-third of the capital gain. This effectively reduces the capital gains tax to 10%.

For example, if the fund makes a $15,000 capital gain on the disposal of an asset and the discount method applies, only $10,000 would be included as taxable income reducing the tax from $2,250 to $1,500.

Different options apply to assets acquired prior to 21 September 1999.

Pension Phase

Upon retirement (or another condition of release), a SMSF member can commence a pension from their member entitlement in the SMSF – the entitlements supporting the pension are referred to as being in pension phase.

Broadly, a complying superfund is entitled to a nil tax exemption for the income attributable to the pension phase benefits of the fund.

This means that an SMSF with members solely in pension phase will be 100% tax free. If a fund has members in both pension and accumulation phase, the proportion of net income which is exempt from tax will generally need to be determined by an actuary.

Once a condition of release is met and a lump sum or pension payment is made to a member, the lump sum or income stream itself is generally tax free in the hands of the member if they are over the age of 60, however there may be some tax payable if they are less than 60.

Summary

The following table summarises the income tax rates which generally apply to complying SMSFs.

 

Accumulation Phase

 

Income Associated with Pension Phase

 

 

Capital Gains (for assets acquired on or after 21 September 1999)

 

 

Special Income and Non-Complying Funds

15%

0%

 

  • 15% if held for less than 12 months
  • 10% if held for longer than 12 months (CGT Discount applicable)

45%

Special income (non-arm’s-length income)

A complying SMSF must pay tax at the highest marginal tax rate on ‘special income’ which includes:

  • Dividends received directly or indirectly from a private company, unless the dividend is consistent with an arm’s length dealing
  • Distributions from a trust where the SMSF does not have a fixed entitlement to income from the trust (generally discretionary trusts)
  • Any other non-arm’s length income of the fund derived from a scheme where the parties are not dealing with each other at arm’s length and the amount of the income is greater than what it would have been had the parties been dealing at arm’s length in relation to the scheme

It is important to remember that an SMSF is a legal tax structure where the sole purpose is to provide for a member’s retirement. There are many issues to consider in addition to the taxation concessions enjoyed by superfunds.

Please contact our Superannuation Manager Helen Cooper on (08) 9316 7000 should you wish to discuss your specific circumstances in more detail.

Any information provided in this article is general in nature and does not take into account your personal objectives, situation or needs. The information is objectively ascertainable and was not intended to imply any recommendation or opinion about a financial product. This does not constitute financial produce advice under the Corporations Act 2001.

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