Changes for individuals, superannuation & pensions
To no-one’s surprise this year’s Federal Budget looks very election-friendly. Tax cuts for the immediate future are targeted at low and middle income earners, who also happen to make up the broadest base of swinging voters. Daniel Arnephy looks at the key changes for individuals, superannuation and pensions.
Personal tax rates
The long term changes to the personal income tax system are central to this Budget. The immediate impact is on low and middle income earners, with more substantial changes to eliminate bracket creep and simplify the tax rates occurring outside the four year forward estimates. In its final form, the changes are fully implemented in 3 elections time.
The three phases of the seven year tax cuts plan are:
- Tax relief of $200 for people earning up to $37,000 and up to $530 for people earning up to $48,000. The benefit scales back from $48,000 – $90,000. This is delivered not by way of rate change, but by an increase in the non-refundable Low Income Tax Offset (LITO). This is from 1 July 2018 until 30 June 2022.
- Increase the top of the 32.5% bracket to $90,000, effective from 1 July 2018. From 1 July 2022 the top of the 19% bracket goes from $37,000 – $41,000 and the top of the 32.5% bracket goes from $90,000 – $120,000. Adjustments to LITO also occur.
- From 1 July 2024 the 37% bracket is removed completely, so the top of the 32.5% bracket goes from $120,000 to $200,000. Top marginal rate remains at 45%, applying from $200,001.
Current resident tax rates are:
|2017-2018 Tax Thresholds||2017-2018 Tax Rates|
|$0 – $18.200||0%|
Medicare is an additional 2% where applicable, so the top marginal rate is effectively 47%.
Based on Budget announcements resident tax rates will become:
|Tax Rate||2018/19 – 2021/22||2022/23 & 2023/24||2024/25 onwards|
|0%||$0 – $18,200||$0 – $18,200||$0 – $18,200|
|19%||$18,201 – $37,000||$18,201 – $41,000||$18,201 – $41,000|
|32.5%||$37,001 – $90,000||$41,001 – $120,000||$41,001 – $200,000|
|37%||$90,001 – $180,000||$120,001 – $180,000||N/A|
The announced increase to Medicare levy to 2.5% has been scrapped and will not go ahead.
Testamentary trust concessional tax rates limit
The Government will clarify that minors will be taxed at adult marginal rates on only the income that arises from assets coming across from the deceased estate (or assets acquired from investment/disposal proceeds of those assets from the deceased estate. It appears that some taxpayers have been inappropriately increasing the assets of testamentary trusts and benefitting from these concessional tax rates.
High profile individuals, celebrities and sports people
The Government will remove the option for high profile people to essentially split their income by being able to licence their fame or image to another entity, such as a discretionary trust. This measure will ensure that all remuneration (cash or non-cash) provided for commercial exploitation of fame or image will be included in the assessable income of the individual. It is not clear if grandfathering of existing arrangements will apply.
This will apply from 1 July 2019.
Individual taxpayer and tax agent compliance
From 1 July 2018 an additional $131 million will be provided to the ATO to increase compliance activities targeting individual taxpayers and tax agents. This includes continuing four income matching programs that were due to terminate on 1 July 2018.
New compliance activities will also be funded including additional audits and prosecutions, improving education and guidance materials, pre-filling of income tax returns and improving real time messaging to tax agents and individual taxpayers to deter over-claiming of entitlements.
Vacant land denied tax deductions for holding costs
From 1 July 2019, deductions will be disallowed for costs associated with holding land, where the land is not genuinely held for income producing purposes. This includes interest costs. Disallowed deductions cannot be carried forward for use in later income years, but certain expenses can continue to be added to the cost base for CGT purposes, if it would already ordinarily be included in the cost base.
This measure is intended to discourage land banking and will not apply where a “carrying on a business” test is satisfied. It also won’t apply to expenses associated with land holding after a property has been constructed and approved for occupation/rent.
Superannuation announcements are limited to some minor tweaks for existing retirees and workers, along with some changes designed to protect retirement savings of younger people. The key measures announced are:
From 1 July 2018:
- Individuals with income exceeding $263,157 that have multiple employers can nominate that their wages from certain employers are not subject to Super Guarantee, to avoid inadvertent concessional cap breaches.
- Extra funding is provided for the ATO to develop a new compliance model for deducting personal super contributions and making appropriate notifications
From 1 July 2019:
- Self-managed super funds (SMSF) can increase members from 4 to 6 people
- Works test exemption for people aged 65 – 74 making voluntary superannuation contributions with a superannuation balance below $300,000, in the first year they don’t meet the work test requirements
- Annual audit requirement for SMSF with good record keeping and compliance history will be changed to three-yearly audit requirement. Government needs to consult further with stakeholders to ensure smooth implementation.
For those with smaller superannuation balances and younger people, the announced measures to apply from 1 July 2019 are:
Accounts with a balance less than $6,000 have fees capped at 3%.
Exit fees on switching super funds will be banned.
Insurance opt-in rules introduced for members with less than $6,000, members under age 25 and members that have accounts without a contribution in 13 months.
ATO will take custody of inactive super accounts less than $6,000 and proactively seek to reunite these balances with a member’s active account using data matching.
Several measures were announced that are targeted at enhancing the standard of living of older Australians. From 1 July 2019:
- Increase the Pension Work Bonus from $250 to $300 per fortnight to earn up to $7,800 each year without impacting their pension. It will also be expanded to allow self-employed retirees to earn up to $300 per fortnight without impacting their pension
- Amend the pension means test rules to encourage the development and take-up of lifetime retirement income products that can help retirees manage the risk of outliving their savings
- Expand the Pension Loans Scheme to everyone over Age Pension age and to increase the maximum fortnightly income stream to 150 per cent of the Age Pension rate. This will enable Australians to use the equity in their homes to increase their incomes.