 The 2016 Federal Budget has been handed down – this special edition of e-Bulletin gives you an overview of the proposed changes, which we will be working through to fully explore the consequences in the event the changes become law.
Many of the changes proposed in this Budget will require careful consideration of your situation – over the coming months we will work with our clients to interpret how the changes might affect you. Please don’t hesitate to start that conversation today if you are concerned – call or email your adviser today.
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Budget 2016: Blueprint for an election
With the federal election to be called as early as this week, the focus has shifted from an earlier emphasis on debt and deficit under Prime Minister Tony Abbott to a more upbeat message promising a new era of nation-building under new Prime Minister Malcolm Turnbull.
Increased infrastructure spending and tax cuts for small to medium enterprises are positioned as the main drivers of growth and jobs.
It is the significant winding back of superannuation tax concessions that are the hidden revenue raising initiative in the Budget.
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The Big Picture
The Reserve Bank’s decision to cut the official cash rate by 25 basis points to a new low of 1.75 per cent on budget day underlines the work that still needs to be done in Australia’s transition from the mining boom to a broader-based economy.
Although the economy is projected to grow by 2.5 per cent in 2015-16, a fall in the annual rate of inflation to 1.3 per cent in the March quarter suggests further stimulus is needed.
The budget deficit is forecast to rise to $37.1 billion in 2015-16 and the Treasurer said the budget is expected to remain in deficit until 2020-21. Net debt is expected to reach $326 billion this financial year, or 18.9 per cent of GDP.
Despite a bounce in prices for iron ore and coking coal in 2016, government revenues have been hit by the higher Aussie dollar and sluggish wages growth. Unemployment is expected to ease to 5.5 per cent this year and wages to rise by 2.5 per cent, barely ahead of inflation at 2 per cent.
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Nation building
As part of its drive to promote jobs and growth, the government will spend $50 billion on infrastructure projects. This includes funding for a series of road and rail projects, including Metro rail projects in Melbourne and Sydney and motorways in Queensland.
While there is less for Victoria than other states, regional areas will benefit from a $2 billion water program to invest in new dams and pipelines. The proposed Brisbane to Melbourne inland rail link has received $594 million for land acquisition and preliminary work.
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A boost to business
Following last year’s tax cut for small businesses, from July 1 this year their tax rate will be cut further to 27.5% and extended to businesses with a turnover of up to $10 million. The turnover threshold will gradually rise so that by 2020 businesses with a turnover of up to $100 million will receive the 27.5% rate.
By 2024 all businesses will pay a company tax at a rate of 27.5%, compared with the current rate of 30%. And by 2027 the tax rate for all businesses will reduce to 25%.
Unincorporated small businesses with a turnover of less than $5 million have not been left out, with an increase in the tax discount to 8 per cent.
Last year’s $20,000 instant asset write-off for small business has been extended to business with a turnover of up to $10 million until June 2017.
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Tax relief for individuals
As expected, the Treasurer has confirmed a tax cut for people earning over $80,000. To prevent workers on $80,000 moving from the 32.5 per cent tax scale to 37 per cent through “bracket creep” as their wages rise, the 37 per cent threshold will be increased to $87,000.
The government estimates this will save 500,000 taxpayers moving into the second highest tax band and although it is expected to cost $3.95 billion over four years, the tax saving will be barely noticed by the majority of tax payers effected.
The Budget Repair Levy on people earning over $180,000 a year will end as scheduled on June 30, 2017.
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Changes to superannuation
The Coalition came to power pledging not to tinker with superannuation during its first term of office, but politics has forced its hand with changes aimed at reducing concessions for high income earners.
From July 1, 2017, there will be a $1.6 million cap on the amount that can be transferred from a super accumulation account into a retirement account, where earnings are tax-free.
There are also new limits on the amount of voluntary, after-tax contributions people can make. Effective immediately is a new lifetime cap, set at $500,000, on non-concessional (after-tax) contributions. Up till now there has been no lifetime limit, with an annual limit of $180,000. This will make it much more difficult to build your retirement nest egg.
Flexibility measures to encourage middle-income earners to save more for a self-funded retirement include allowing workers with super balances under $500,000 who have not already maximised their concessional caps to bring forward up to five years’ worth of contributions on rolling basis.
The annual income threshold at which the high-income super contributions tax rate of 30 per cent applies on concessional contributions will be lowered from $300,000 to $250,000. Everyone else will continue to pay the concessional rate of 15 per cent.
The annual cap on concessional contributions will also be lowered to $25,000.
Other changes to make the contribution rules more flexible include allowing all savers under the age of 75 to claim a tax deduction for personal contributions up to the concessional cap. Tax breaks will also be extended for people who top up their low-income spouse's super fund.
As expected, the government has maintained the Low Income Superannuation Contribution (LISC), renaming it the Low Income Superannuation Tax Offset (LITSO). This means workers earning less than $37,000 a year will continue to receive an automatic rebate worth up to $500 annually.
Rules for transition to retirement pensions have also been tightened. Lump sum withdrawals will no longer be allowed and people aged 60-65 will no longer be able to withdraw tax-free earnings.
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Multinational tax avoidance
To avoid criticism of only cutting taxes for the wealthy and business, the government will spend $2 billion on new measures to crack down on multinational tax avoidance.
Multinational corporations will face a diverted profits tax on income they attempt to shift offshore – the so-called ‘Google tax’ – at a penalty rate of 40 per cent. This will be policed by a 1000-member ATO task force.
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Youth into work
The Treasurer unveiled a new Youth Jobs PaTH at a cost of $752 million. The program will be rolled out in three stages, beginning in April 2017 with intensive pre-employment training. Paid internships and youth wage subsidies for employers will follow.
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Health and education
As previously announced, public hospitals will be given a $2.9 billion boost in total spending over three years.
The government has pledged to restore an extra $1.2 billion of the Gonski payments to schools in 2018 and 2019. Universities will still be hit with a 20 per cent funding cut, originally part of a fee deregulation package that has been scrapped.
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Looking ahead
Treasurer Scott Morrison has crafted what he called an ‘extraordinary’ budget to set the scene for the Coalition’s re-election campaign.
He has attempted to strike a balance between positive measures to stimulate business investment and employment, while stressing that all spending would be ‘practical, targeted and responsible’.
What is out of the ordinary is that the success of this year’s budget will be tested at the ballot box within a matter of months.
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Phillipsons Accounting Services Pty Ltd ABN 89 103 720 190, registered office 388 Raymond Street Sale Vic. 3850, has not taken into account any particular person’s objectives, financial situation or needs in preparing this publication. Readers should, before acting on this information, consider the appropriateness of this information having regard to their personal objectives, financial situation or needs. We recommend that investors obtain financial advice specific to their situation before making any financial investment or insurance decision. Information contained in this newsletter does not constitute legal advice. From time to time Phillipsons Accounting Services or its employees or agents may have an interest in or receive pecuniary and non-pecuniary benefits from the services mentioned herein.
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