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Federal budget 2018: tax relief in sight

 

May 2018

 

 

 

 

 

Tax cuts weren’t the only measure introduced last night that may affect your finances, but they’re likely to have the biggest impact long term, writes Gayle Bryant.

A three-part, seven-year personal tax plan was the centrepiece of the federal government’s 2018 budget, which according to Treasurer Scott Morrison, was designed to deliver “what can be responsibly afforded while keeping the budget on track”.

Initially it will be lower income earners that will benefit. Higher-income earners, including those in the top tax threshold of $180,000 and above will have to wait until 2024-25 for their tax cuts to take effect.

But the plan should deliver some meaningful relief. By the 2024-25 financial year the top tax threshold (at 45 per cent) will only apply to those earning more than $200,000 p.a. (about 6 per cent of taxpayers). So by the end of that financial year, $7225 will be cut from the tax bill of someone earning $200,000.

Proposed tax threshold changes

Proposed tax threshold changes
Tax rate (%) Current ($) July 1,2018 ($) July 1, 2022 ($) July 1, 2024 ($)

0

0-18,200

0-18,200

0-18,200

0-18,200

19

18,201-37,000

18,201-37,000

18,201-41,000

18,201-41,000

32.5

37,001-87,000

37,001-90,000

41,001-120,000

41,001-200,000

37

87,001-180,000

90,001-180,000

120,001-180,000

(no longer exists)

45

180,001-plus

180,001-plus

180,001-plus

200,001-plus

Source: Budget Papers

 

Federal Treasurer Scott Morrison said the tax cuts were “not spending or a give-away” but were about enabling Australians to keep more of what they earned.

One reason Morrison cites for motivating the tax cuts is that bracket creep is due to become a big issue: “Under our personal tax plan, 94 per cent of Australian taxpayers will pay no more than 32.5 cents in the dollar. That compares to 63 per cent if we leave the system unchanged.”

(The table above shows how the tax brackets will change over the three phases of the government’s tax plan.)

ANZ economists Cherelle Murphy and Jack Chambers said they are supportive of the personal tax plan: “This was necessary to give households some relief from bracket creep, which would have eaten up some disposable income.”

But they described it as complex, pointing out how it has been introduced in stages to “isolate the benefits to low and middle income earners in the first place and lessen political criticism”.

Another beneficial tax measure worth noting is that the government will keep the Medicare levy at 2 per cent, instead of increasing it to 2.5 per cent from July 1, 2019 as previously planned.

Abolishing the 37 per cent bracket

The Treasurer’s tax plan culminates in the 2024-25 financial year where the 37 per cent tax bracket will be abolished entirely, reducing the number of tax brackets from five to four. The top marginal tax rate remains at 45¢ but the threshold it applies from rises from $180,001 to $200,001. This means all Australian taxpayers who are earning between $41,000 and $200,000 will only pay 32.5¢ in the dollar from this time.

Cracking down: family trusts, vacant land ownership

Anti-avoidance measures will be extended to family trusts engaging in ‘round robin’ arrangements whereby the trusts act as beneficiaries of each other and the distribution is ultimately returned to the original trustee tax free. This measure will apply from July 1, 2019.

"This measure will better enable the ATO [Australian Taxation Office] to pursue family trusts that engage in these arrangements by extending the specific anti-avoidance rule, imposing tax on such distributions at a rate equal to the top personal rate plus the Medicare levy," the government states in the budget papers.

Expenses associated with holding vacant land will no longer be tax deductible. This measure is to ensure no deductions are claimed for vacant land that is not genuinely held for the purpose of earning assessable income. It is expected to add $50 million to the budget bottom line and will take effect from July 1, 2019.

Superannuation

Quite a number of changes were made to super. Most are focused on low income, but a few will be of specific help to the wealthy.

Individuals whose income exceeds $263,157 and have multiple employers will be able to nominate that their wages from certain employers are not subject to the superannuation guarantee from July 1.

This measure will allow eligible individuals to avoid unintentionally breaching the $25,000 annual concessional contributions cap as a result of multiple compulsory contributions.

Of benefit to self-managed super funds, those with a history of good record-keeping and compliance will be subject to a three-yearly audit requirement, rather than annually, starting July 1, 2019. The new measure is intended to start on July 1, 2019. However the government has said it will consult with stakeholders on the proposal.

Commentators have said this could raise compliance issues for SMSF trustees.

The super work test will not apply to those aged 65 to 74 with a super balance below $300,000 (can make voluntary contributions in the financial year after the in the first year that they do not meet the work test requirements. This measure will take effect from 1 July 2019 the work test).

Business

As was speculated before the budget was handed down, tax deductions for eligible asset purchases of less than $20,000 by businesses with revenue up to $10 million will continue, with the government extending the measure into the new financial year.

Business owners can claim the deduction on the asset in one go rather than depreciating it over several years. It’s been the case for the past few years but the extension of the provision will be welcomed by small businesses.

Tax offsets for eligible research and development “benefiting Australia” will continue, but proving such eligibility will become tougher.

And with a focus on multinationals, the government will tighten rules around stapled structures, broaden application of the multinational anti-avoidance law and the diverted profits tax, while strengthening rules that stop companies loading up on debt to shift profits offshore.

Economy and the nation

What has put the Australian economy and federal revenue in such a good position so that tax cuts can be implemented are higher commodity prices, along with higher company profits and higher employment – all bringing in more tax revenue.

The budget is forecast to return to a modest balance of $2.2 billion in 2019-20 and increase to projected surpluses of $11 billion in 2020-21 and $16.6 billion in 2021-22. Meanwhile, government debt continues to climb with the deficit in the 2018-19 federal budget equal to 0.8 per cent of Australia’s gross domestic product.

In their bottom-line assessment, ANZ’s economists said the government spent less of the increase in tax revenue than expected, allowing the budget to return to balance one year earlier than previously expected.

“That fiscal prudence has come at the ‘cost’ of fewer giveaways than might have been the case ahead of an election. We expect the government to gain favourable comment for banking some of the revenue gains with enough left over for a variety of measures, include personal income tax cuts.”

To discuss what this insight could mean for you, talk to your ANZ Private Banker directly, or contact us below.

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The statements in this presentation are based on an interpretation of the proposed Federal Budget 2018/19 announced on 8 May 2018 (the Budget). The Budget is subject to the passing of legislation and, accordingly, may not become law or may change. Changes in Government policy and legislation may dramatically alter the information, opinions or conclusions in this presentation ("information"). You should not rely on this interpretation and should consider the Budget and any subsequent changes yourself.

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