Federal Budget 2018: what it means for financial services professionals

Strategies

David Barrett
Wednesday 09 May 2018

What it means for financial services professionals

The Federal Treasurer, the Hon. Scott Morrison MP, delivered his third Federal Budget on 8 May 2018.

Income tax cuts will be delivered over a six-year period, through a combination of tax rate threshold changes and tax offsets. Business owners may benefit from an extension of the small business instant write-off provisions and the Government has further committed to its Enterprise Tax Plan to reduce the corporate tax rate.

With regard to superannuation, the maximum number of members in a self managed superannuation fund will increase, and those with good record-keeping and compliance history may move to a three-yearly audit cycle.

The work test for certain individuals aged 65-74 will be removed, and certain longevity retirement income products may be more concessionally treated under the age pension means testing than originally proposed.

This summary provides coverage of the key issues of most interest in relation to advice given by financial services professionals.


Highlights

Personal income tax

  • Income tax cuts through a combination of tax rate threshold changes and tax offsets.
  • Medicare levy increase to 2.5 per cent from 1 July 2019 removed.
  • Additional funding given to the ATO to ensure individual taxpayers do not over-claim deductions or entitlements.
  • Tax deductions denied for expenses associated with holding vacant land.
  • Minor beneficiaries will be taxed under general minor tax rates, not adult tax rates, on income from certain assets in a testamentary trust.
  • 50% CGT discount removed at the trust level for Managed Investment Trusts and AMITs.

Business owners

  • Extension of the provision allowing small business to instantly write-off asset purchases under $20,000.
  • Cash payments to businesses will be restricted to $10,000 or less.
  • Deductions for wages and contractor payments denied where PAYG obligations not fulfilled.
  • GST to be levied by foreign sellers of Australian hotels online.
  • Government commitment to its Enterprise Tax Plan (progressively reduce corporate tax rate to 25%) affirmed.
  • Small business CGT concession removed on disposal of rights to partnership income.
  • Additional funding given to the Tax Practitioners Board to enforce professional and ethical standards of tax agents and tax (financial) advisers.

Superannuation

  • Self managed superannuation fund (SMSF) member limit increase.
  • SMSF three-yearly audit cycle.
  • Work test exemption for those with balances of less than $300,000.
  • Individuals with multiple employers able to opt out of Superannuation Guarantee.
  • Improving the integrity of personal deductible super contributions.
  • Opt-in basis for default insurance inside superannuation.
  • Passive fees, exit fees and inactive super.
  • Requiring superannuation fund trustees to offer Comprehensive Income Products for Retirement (CIPRs).
  • Simplified retirement income product disclosure.
  • Increase in Financial Institutions Supervisory Levies.
  • Minor technical amendments to transition to retirement (TTR) pensions and deferred annuities.

Social security

  • Expansion of the Pension Loan Scheme.
  • Extension of the Pension Work Bonus.
  • New means testing rules for lifetime retirement income products.

Aged care

  • Improving access to residential and home care.

Other measures

  • Additional funding for the Australian Financial Complaints Authority (AFCA).
  • Funding for ASIC to enhance female financial capability.

Personal income tax

Personal income tax

A number of changes have been proposed to reduce personal income tax on a staggered basis over a six-year period from 1 July 2018.


Increase in tax bracket thresholds

The 32.5 per cent upper threshold will be increased from $87,000 to $90,000 from 1 July 2018. The existing threshold was increased from $80,000 to $87,000 from 1 July 2016.

The increase to $90,000 reduces the tax liability of those earning $90,000 or more by $135.

A further increase in this threshold to $120,000 is proposed from 1 July 2022.

In addition, the 19 per cent upper threshold will increase from $37,000 to $41,000 from 1 July 2022.

From 1 July 2024, the Government will extend the top threshold of the 32.5 per cent personal income tax bracket from $120,000 to $200,000, to recognise inflation and wage growth impacts. Taxpayers will pay the top marginal tax rate of 45 per cent from taxable incomes exceeding $200,000 and the 32.5 per cent tax bracket will apply to taxable incomes of $41,001 to $200,000.

These threshold and tax rate changes are summarised in the following tables.

Taxable incomeTax payable* (residents) 2017-18
Up to $18,200 Nil
$18,201 - $37,000 Nil + 19%
$37,001 - $87,000 $3,572 + 32.5%
$87,001 - $180,000 $19,822 + 37%
Above $180,000 $54,232 + 45%

Taxable incomeTax payable* (residents) 2018-19, 2019-20, 2020-21, 2021-22
Up to $18,200 Nil
$18,201 - $37,000 Nil + 19%
$37,001 - $90,000 $3,572 + 32.5%
$90,001 - $180,000 $20,797 + 37%
Above $180,000 $54,097 + 45%

Taxable incomeTax payable* (residents) 2022-23, 2023-24
Up to $18,200 Nil
$18,201 - $41,000 Nil + 19%
$41,001 - $120,000 $4,332 + 32.5%
$120,001 - $180,000 $30,007 + 37%
Above $180,000 $52,207 + 45%

Taxable incomeTax payable* (residents) 2024-25
Up to $18,200 Nil
$18,201 - $41,000 Nil + 19%
$41,001 - $200,000 $4,332 + 32.5%
Above $200,000 $56,007 + 45%

Low Income Tax Offset

The existing Low Income Tax Offset (LITO) will be increased to a maximum of $645 for those with taxable income less than $37,000 from 1 July 2022. LITO will phase out at 6.5% in the income range from $37,000 to $41,000, and at 1.5% thereafter.

Taxable income ($)Low Income Tax Offset 2017-18Low Income Tax Offset 2022-23
0 – 37,000 $445 $645
37,001 – 41,000 $445 - (Taxable inc – 37,000) * 1.5% $645 - (Taxable inc – 37,000) * 6.5%
41,001 – 66,667 $445 - (Taxable inc – 37,000) * 1.5% $385 - (Taxable inc – 41,000) * 1.5%
Above 66,667 Nil Nil
Effective tax free threshold $20,542 $21,595

Low and Middle Income Tax Offset

A new non-refundable tax offset will be available for the 2018-19, 2019-20, 2020-21 and 2021-22 income years, in addition to the existing Low Income Tax Offset.

Taxable income ($)Low and Middle Income Tax Offset
0 – 37,000 $200
37,001 – 48,000 $200 + (Taxable income – 37,000) * 3%
48,001 – 90,000 $530
90,001 – 125,333 $530 – (Taxable income – 90,000) * 1.5%
Above 125,333 Nil

Medicare levy thresholds for 2017-18

The threshold for singles will be increased from $21,655 to $21,980. The family threshold will be increased from $36,541 to $37,089. For single seniors and pensioners, the threshold will be increased from $34,244 to $34,758. The family threshold for seniors and pensioners will be increased from $47,670 to $48,385. For each dependent child or student, the family income thresholds increase by a further $3,406, instead of the previous amount of $3,356.


Increase in the Medicare levy

The Government will not proceed with the increase to the Medicare levy rate from 2.0 to 2.5 per cent of taxable income from 1 July 2019. The increase was originally announced in the Federal Budget 2017-18.

For more information, see Budget Fact Sheet 7 and the Government’s Tax Relief Calculator.


Denying deductions for vacant land

Expenses associated with holding vacant land will cease to be deductible from 1 July 2019 and will not be able to be carried forward.

Such expenses for land that was previously vacant will only become deductible when:

  • construction is complete, approval for occupancy has been granted and the property is available for rent, or
  • the land is used in carrying on a business.

Denied deductions will not automatically be included in the cost base of a CGT asset. Taxpayers will need to assess the expenses against existing cost base element rules.


Ensuring tax compliance for individuals

Additional funding will be provided to the ATO to assist its compliance activities around taxpayers that over-claim deductions or entitlements.

The funding will complement and strengthen the ATO’s data matching and pre-filling activities.


Improving the taxation of testamentary trusts

Current rules allow minors to be taxed as adults in respect of income paid on assets or cash proceeds held within a testamentary trust.

This new measure, commencing on 1 July 2019, will ensure that minors are taxed in a manner consistent with other income earned and prevent assets being placed into a testamentary trust that were not related to the deceased estate.


Removing the CGT discount on gains made within a Managed Investment Trust (MIT) or Attribution MIT (AMIT)

Presently, MITs and AMITs are entitled to a 50% discount for capital gains made on assets held within the trust for longer than 12 months.

From 1 July 2019, this CGT discount will no longer be allowed at the trust level. This means each beneficiary taxpayer must determine their own entitlement to a CGT discount upon receiving a capital gain distribution through a MIT or AMIT.

Business owners

Business owners

Continuation of small business asset write-offs ($20,000 threshold)

Small businesses will be given an additional 12 months to write off assets costing less than $20,000, provided they are installed ready for use by 30 June 2019.

Depreciation pools will continue to be allowed for assets costing $20,000 or more.


Economy wide cash payment limit of $10,000

From 1 July 2019, any payments for goods or services to businesses that exceed $10,000 will no longer be allowed to be paid with cash. They can only be paid electronically or via cheque.

Transactions with financial institutions and consumer to consumer (non-business) transactions will not be subject to this cash limit.


Removing tax deductibility of non-compliant payments

Where an employer fails to withhold an amount of PAYG from payments to an employee or to a contractor (where no ABN is provided), a deduction for the payment will be denied.

This measure will commence from 1 July 2019.


GST on online hotel bookings sold by offshore providers

The current exemption allowing offshore sellers of Australian hotel rooms online not to charge GST to consumers will be removed from 1 July 2019.

The proposal requires unanimous approval from the States and Territories and mirrors previous GST changes to digital products and low value importations.


Partnerships and small business concessions

The small business CGT concessions will no longer be available in respect of the disposal, creation or assignment of rights to future income of a partnership (also called an “Everett assignment”).

The measure will apply from the date of the budget, 7:30pm 8 May 2018.


Tax Practitioners Board (TPB) – Additional funding

Additional funding will be granted to the TPB to ensure that tax agents and tax (financial) advisers are held to the appropriate professional and ethical standards set by the TPB and the Tax Agent Services Act (2009)

Superannuation

Superannuation

SMSF member limit increase

The maximum number of members allowable in self managed superannuation funds (SMSFs) and small APRA funds will increase from four to six from 1 July 2019.


SMSF three-yearly audit cycle

SMSFs with a good record-keeping and compliance history will move from an annual audit to a three-yearly audit from 1 July 2019. To qualify the SMSF will be required to have three consecutive clear audit reports and lodged their annual returns on time.


Work test exemption for those with balances of less than $300,000

From 1 July 2019 those aged 65 to 74 with a total superannuation balance of less than $300,000 will be eligible to make voluntary contributions in the financial year following the year they last met the work test.

Eligibility will be assessed based on the individual’s total superannuation balances at the beginning of the financial year following the year that they last met the work test.

Example from Budget Fact Sheet 3.2:

At the age of 68, Gus retires from full-time work on 1 June 2020. As he would not meet the work test in the 2020/21 financial year, Gus would currently be prevented from making any voluntary super contributions after 30 June 2020.

As his total superannuation balance is $150,000 at the end of the 2019/20 financial year, Gus is eligible to make contributions under the work test exemption from 1 July 2020 to 30 June 2021.

As Gus had not reached his concessional contribution cap over the past 2 years, having contributed only $18,000 in 2018/19 and $12,000 in 2019/20, under the existing carry forward arrangements and new work test exemption Gus can contribute up to $45,000 at concessional tax rates in the 2020/21 financial year.

As a result of the work test exemption, Gus is also able to contribute up to $100,000 in non-concessional contributions in 2020/21.


Individuals with multiple employers able to opt out of Superannuation Guarantee

Individuals who earn over $263,157 from multiple employers will be able to nominate that their wages from certain employers are not subject to the Superannuation Guarantee (SG) from 1 July 2018. This will allow eligible individuals to avoid unintentionally breaching the concessional contributions cap as a result of receiving SG contributions from multiple employers. Employees who use this measure could negotiate to receive additional income, taxed at marginal tax rates.


Improving the integrity of personal deductible super contributions

The Australian Taxation Office (ATO) will receive additional funding to improve the integrity of the process for deducting personal superannuation contributions from 1 July 2018. This will include a new compliance model and additional compliance and debt collection activities. A new acknowledgement will also be added to income tax returns to confirm that an individual who is claiming a deduction has met the ‘notice of intent’ requirements.


Opt-in basis for default insurance inside superannuation

The Government proposes to amend the default insurance arrangement in superannuation funds, which currently requires members to opt-out of cover, to be on an opt-in basis. This change will apply to members:

  • with a balance of less than $6,000
  • under the age of 25 years, or
  • whose account has been inactive (ie hasn’t received a contribution) for 13 months or more.

The changes are proposed to take affect from 1 July 2019. A transition period of 14 months will allow affected members to decide whether or not to opt-in.

Draft legislation to implement this measure has been released for consultation.

The Government will also consult publicly on how to balance retirement savings objectives and insurance cover inside super.


Passive fees, exit fees and inactive super

From 1 July 2019, a three per cent annual cap on passive fees will apply to superannuation accounts where the balance is below $6,000. In addition, exit fees will be banned on all superannuation accounts.

Superannuation funds will also be required to transfer inactive accounts (ie that have not received a contribution for at least 13 months) with a balance of less than $6,000 to the ATO. The ATO will proactively reunite inactive accounts with active accounts where the value of the consolidated account will be at least $6,000.

Draft legislation to implement this measure has been released for consultation.


Requiring superannuation fund trustees to offer CIPRs

The Government will introduce a retirement income covenant into the Superannuation Industry (Supervision) Act 1993 that requires trustees to develop a strategy that would help members achieve their retirement income objectives. The intention is to focus the industry on providing a higher standard of living for retirees.

The covenant will require trustees to offer CIPRs which provide individuals with income for life.

The Government will be releasing a position paper for consultation on this measure shortly.


Simplified retirement income product disclosure

The Government is proposing a new approach to retirement income product disclosure rules that will require providers to report simplified, standardised information on retirement income products.


Increase in Financial Institutions Supervisory Levies

From 1 July 2018, financial institutions’ supervisory levies are proposed to increase to fully recover the cost of superannuation activities undertaken by the ATO.


Minor technical amendments to TTR pensions and deferred annuities

The Government is proposing amendments that will be beneficial for superannuation funds and their members. These are technical amendments to the transition to retirement income stream rules relating to the death of a member and addressing double taxation in respect of deferred annuities purchased by a superannuation fund or retirement savings account. The measures are contained in Treasury Laws Amendment (2018 Measures No.4) Bill 2018, currently before Parliament.

Social security

Social security

Expansion of the Pension Loan Scheme

From 1 July 2019:

  • all Australians of age pension age will be eligible, including full rate age pensioners (currently excluded from the scheme)
  • the maximum loan amount will increase from 100 per cent to 150 per cent of age pension.

The loan is paid fortnightly, is tax-free and currently attracts compound interest of 5.25 per cent on the outstanding balance.

For more information, see Budget Fact Sheet 3.3.


Extension of the Pension Work Bonus

From 1 July 2019:

  • the bonus will increase from $250 to $300 per fortnight. This means that the first $300 of income from work each fortnight will not count towards the pension income test
  • eligibility will be extended to the self-employed, subject to a ‘personal exertion’ test, reflecting the intention that the bonus not apply to investment income.

For more information, see Budget Fact Sheet 3.1.


New means testing rules for lifetime retirement income products

From 1 July 2019:

  • a fixed 60 per cent of all pooled lifetime product payments will be assessed as income
  • 60 per cent of the purchase price of the product will be assessed as assets until age 84, or a minimum of 5 years, and then 30 per cent for the rest of the person's life.

For more information, see Budget Fact Sheet 3.4.

Aged care

Aged care

Improving access to residential and home care

The Government will provide additional funding to deliver a package of measures to improve access to aged care for older Australians. The More Choices for a Longer Life package includes 14,000 new high level home care packages over four years from 2018/19 and 13,500 residential aged care places in 2018/19. It also includes funding to deliver home care packages and residential care in rural, regional and remote communities as well as preparatory work for a new national assessment framework for people seeking aged care.

A new Aged Care Quality Safety Commission is also proposed to be established to ensure the quality of care provided by the aged care system.

Other measures

Other measures

Additional funding for the Australian Financial Complaints Authority (AFCA)

An additional $1.7 million will be provided in 2018/19 to AFCA to support its establishment.


Funding for ASIC to enhance female financial capability

A grant of $10 million will be provided to ASIC in 2018/19 to support initiatives to enhance female financial capability.

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