On Tuesday night the Treasurer Scott Morrison handed down the 2018 Federal Budget. The 2018-19 Australian Commonwealth Budget is a budget focused on small amendments rather than sweeping reforms. It is an election budget designed to win the hearts and minds of middle class Australia through tax reform and aged care spend. There were also a number of measures that will benefit the economy and the country as a whole. This federal budget not only hands out $140bn in tax income cuts but it locks in a surplus within three years and reduces Government debt. It also looks to spend big on infrastructure and healthcare.
Self managed superannuation funds (SMSFs) were largely left out of this year’s budget, a relief for SMSF trustees. In this budget you will find measures that may improve your financial position. We have provided a summary of how the main budget changes may impact you, your family and your investments. Here are the main changes:
- Tax reductions for low and middle income earners. Reducing tax brackets.
- Lower fees and a ban on exit fees on all super funds.
- Opt-in insurance for young and low super balance Australians.
- Increasing SMSF members from 4 to 6.
- Expanding the pension loan scheme to all older Australians.
- Increased spending on home aged care.
- An extra $25bn in infrastructure spending.
It is important to note that the Budget announcements are still only proposals at this stage.
Significant Tax Changes – The plan will be delivered in 3 stages:
Immediate tax relief for low and middle income earners. Increase in the top threshold of the 32.5% personal income tax bracket from $87,000 to $90,000. Making personal taxes simpler and flatter.
The first step is to deliver tax relief to low and middle income earners via a tax offset which will provide tax relief of up to $530 to low and middle income earners for the 2018-19, 2019-20, 2020-21 and 2021-22 income years. The offset will assist over 10 million Australians and around 4.4 million people will receive the full $530 benefit for 2018-19. The benefit will be available on assessment after you lodge your tax return. The second step is to protect middle income earners from bracket creep. This is done by increasing the top income threshold of the 32.5% tax bracket from $87,000 to $90,000. From 1 July 2022 the top threshold of the 32.5% tax bracket will be increased from $90,000 to $120,000, providing a tax cut of up to $1,350 per year. From 1 July 2024, the Government will increase the top income threshold of the 32.5% tax bracket from $120,000 to $200,000, removing the 37% tax bracket completely. Roughly 94% of all taxpayers are projected to face a marginal tax rate of 32.5% or less from 2024-25.
The changes to personal income taxes were designed to benefit lower-middle income earners rather than high income earners. Bracket creep affects lower-income earners more than higher earners. But in the end, roughly 94% of tax payers will pay 32.5% tax or less by 2024. The assumption is that the personal tax refund of $530 and cuts will boost spending and inflation. This could give reason for the RBA to raise rates if inflation rises. A boost in spending can be a positive for consumer discretionary companies.
Reduction in fees and a ban on exit fees on all super funds
If you have multiple superannuation funds from different jobs, you can now transfer and consolidate them all into your active superannuation account. This can be done through the myGov website and you won’t be charged an exit fee.
The changes to superannuation exit fees are largely positive for superannuants but negative for superannuation companies. The ATO will proactively consolidate dormant superannuation funds with a superannuant’s active account. It will use its sophisticated data matching technology to find lost super funds. This is expected to return $6 billion to three million super fund members by 2020.
Changes to insurance in superannuation
The Government will also stop funds from charging people under 25 or with low balances for default life insurance policies. Insurance in superannuation will only be able to be offered on an opt-in basis for -Members with low balances of less than $6,000, under 25 or have inactive funds. There will also be a 3% annual cap on passive fees charged by superannuation funds on accounts with balances below $6,000. These changes will take effect from 1 July 2019.
Superannuation funds will be banned from automatically signing people aged under 25 to life insurance policies which means they’ll be a reduction in revenue for Insurance companies going forward. The Government is looking to protect the retirement savings of young people by ensuring their superannuation is not eroded by premiums on insurance policies they do not need.
Three-yearly audit cycle for some self-managed superannuation funds
The budget will change the annual audit requirement for SMSFs to a three yearly requirement for funds with a history of good record keeping and compliance from 1 July 2019. This will cut red tape for SMSF trustees that have a three consecutive years of clear audit.
Whilst the measure will have no revenue impact it will help reduce costs for SMSFs. This means superannuants will only be required to pay for one audit per three years, provided they meet the above criteria, which could save them about $1000 on average.
Increasing the number of maximum allowable members in SMSs from four to six
As announced at the SMSF Expo on 27 April 2018, the Government will increase the maximum number of allowable members in new and existing SMSF and small APRA funds from four to six, from 1 July 2019. This will provide greater flexibility for joint management of retirement savings, in particular for large families. The measure is estimated to have no revenue impact over the forward estimates.
The measure will give greater flexibility for SMSFs especially for families and small business owners looking to utilise an SMSF as their retirement savings vehicle.
$75bn in infrastructure spending which includes $25.4bn in new projects.
Not surprisingly infrastructure spending was a key theme of this budget. The Government has a responsibility to provide infrastructure to benefit both business and the community. It will also has a responsibility to support industries and jobs. As a result it outlined a $75bn 10‑year national infrastructure plan will benefit people and businesses in every State and Territory by improving road safety, tackling congestion and delivering essential rail links. Here are the projects involved:
- $5bn for Melbourne Airport rail.
- $1.75bn for North West Link.
- $475mn for Monash University Rail.
- $400mn for the Port Botany rail line duplication.
- $155mn for the Shoalhave Bridge in Nowra.
- $971mn for the Pacific Highway to bypass Coffs Harbour.
- $5.2bn for the Bruce highway upgrades.
- $1bn M1 Pacific motorway.
- $390m Beerburrum to Nambour rail upgrade.
- $300m Brisbane Metro.
- $170m Amberley interchange.
- $64.2m Warrego highway.
Estimates of the multiplier effect of infrastructure projects suggest an average multiplier of about four – meaning a $1 investment generates GDP increases that over the 25-year life of the asset add up to $4. The ramp up infrastructure spending will clearly be a boost for listed public works contractors and building materials groups. It could also benefit road toll and airport operators.
The Age Care sector will receives a boost
The Aged-care sector will receive $1.6bn to assist older Australians with services in their own homes. Roughly 14,000 people will be able to stay in their homes rather than in nursing homes. The release of 13,500 residential aged care places and 775 short term restorative care places in the 2018-19 Aged Care Approvals Round. Pensioners will also be able to earn more money without impacting their pension.
Aged care and nursing home operators could be affected by these changes. The government will revamp the aged-care system by pulling block-funding from providers and giving it back to people in need of residential aged care. Lobby groups are worried that the move towards at-home care might reduce the total number of aged-care places in the community.
Regulation into misconduct in the Banking, Superannuation and Financial Services Industries
The budget has announced $10.6m over two years to ASIC and $2.7m to APRA to assist in the Royal Commission. Funding of $5.9m for ASIC in 2017-18 has already been provided for by the Government. These costs will be offset by other industry levies.
The biggest message from the Royal Banking Commission is that the banks and other financial institutions need to put the customer first. The long term positives for consumers will easily outweigh the negative headwinds facing the banking sector at the moment.
Other major sections of the Budget include:
- $500m for genomic research
- $2.4bn in public tech infrastructure – super computers, GPD, space agency, AI
- $1bn urban congestion fund
- $160m to help police. Fight crime and terrorism.
- Backing regional Australia
- Crackdown on multinationals and black economy saves $5.3bn.
- Boosting child care, preschools and student opportunities
- Keeping Australia safe
- Targetting the welfare system
- Cracking down on the black economy
- Making multinationals pay more tax
- Protecting the integrity of the tax system
It should be noted that the Government is opposed to the Labor party’s proposed changes to remove the refund of tax paid on franking credits. Changing such rules will penalise investors who hold high dividend paying shares and it penalises retirees who have saved for their retirement and rely on the income generated from these tax refunds. The status quo is maintained.
Overall the budget was a good one with a deficit forecast in 2018-2019 of $14.5bn the lowest in a decade and a surplus of $2.2bn in 2019-2020. That’s one year ahead of expected in last year’s budget. The Australian economy in its 27th year of consecutive growth with business conditions at the highest level since the global financial crisis. A stronger economy will benefit all Australians. Under the Government’s plan, jobs are being created, investment is rising and the budget is strengthening. That ensure the benefits of stronger economic growth can continue to be secured and shared.