Federal Budget 2016-2017
With the Reserve Bank today dropping the cash interest rate to a record low 1.75%, the Federal Budget handed down tonight was either going to provide a double bonus, or be a case of give with one hand and take with the other. On balance, the Budget is a mixed bag of benefits to some, and removing benefits from others. The big winners in this budget are:
- Companies – corporate tax rate to be cut to 25% over the period to 2026-2027
- Businesses – small businesses concessions extended to business with turnovers under $10 million (currently $2 million).
- Those earning over $80,000 – the threshold for the 32.5 % marginal rate will increase from $80,000 to $87,000
- Young people looking for work – establishment of Youth Jobs PaTH – delivering internships and financial incentives to both job seekers and employers
The big losers are:
- Superannuation – major changes to the taxation of earnings in super funds, limits on the amounts that can be contributed and higher tax on contributions for those earning more than $250,000 (currently $300,000)
- Families – deferral of the Child Care package announced in last year’s Budget. The deferral is blamed on the Senate not passing the Family Tax Benefit changes from last year’s Budget
- Sick – extension of the pause on indexation of the Medicare Benefits Schedule fees for GPs, medical specialists and other health practitioners
- People paying Medicare Levy Surcharge and Private Health Insurance rebates – freezing the rebate thresholds for a further three years
Overview
The talk before the Budget was released, and in the Budget speech, was all about “jobs and growth”.
The Budget itself talks a lot about the transition to a broader-based growth, which essentially refers to a move away from the reliance on mining.
Growth
Real GDP growth is forecast at 2.5% in both the 2016 and 2017 financial years, increasing to 3% in 2017-2018. There is a risk of low inflation, wage growth and productivity growth, which could result in lower global growth over time.
Deficit
The underlying cash deficit is forecast to be $37.1 billion in 2016-2017, reducing to a deficit of $6 billion by 2019-2020. This is based of an increase in tax receipts of between 6% – 7% each year, as well as cuts to spending (relative to GDP) . Are these figures realistic though?
Others are asking the same questions of the Treasurer as well, which is a fair question given that for the last 8 years or so the forecasts have always been optimistically higher than the results that have eventuated. Reading through the Budget papers, there are a lot of assumptions about further growth in GDP and tax revenues that underpin the results that have been forecast – i.e. a lot has to go right with the government’s plans for the forecasts to come off.
Government Debt
Net debt is expected to peak in 2017-2018 before declining – this means it will increase in both the next financial year and the financial year after.
Net debt is forecast to increase from $285.7 billion in 2015-2016 to $356.4 billion in 2018-2019 (a 24.7% increase). Total liabilities will increase from $730.4 billion (2015-2016) to $886.6 billion (2018-2019) to $909.2 billion (2019-2020) – a 24.47% increase over 3 years. ]Table 3 Statement 3: Fiscal Strategy and Outlook, Budget Papers No. 1 http://budget.gov.au/2016-17/content/bp1/html/bp1_bs3-01.htm].
The face value of Commonwealth Government Securities (gross debt) is projected to rise from $499 billion in 2016-2017 to $584 billion by the end of the forward estimates, and to continue to rise to $640 billion by 2026-2027.
As at the December 2015 quarter, 63.5% of total CGS on issue were held by non-residents of Australia [Chart 3 http://budget.gov.au/2016-17/content/bp1/html/bp1_bs6-01.htm] Compared with the Mid Year outlook, net financial worth has deteriorated over the forward estimates. This reflects higher Commonwealth Government Securities issued and a lower value of investments held by the Government, including the Future fund [3-17 Statement 3, Budget Papers No 1. http://budget.gov.au/2016-17/content/bp1/html/bp1_bs3-01.htm].
Commonwealth Government Securities on issue over the forecasts
Government Spending
Welfare spending makes up 80.5% of the total tax collected from individuals – slightly down on last year’s figure of 81.22%.
Total receipts from Individuals and other withholding taxes in 2016-2017 estimated to be $196.95 billion [Table 6 Statement 4: Revenue http://budget.gov.au/2016-17/content/bp1/html/bp1_bs4-02.htm]. Total spending on Social Security and Welfare – $158.612 billion {Table 3, Statement 5: Expenses and Net Capital Investment http://budget.gov.au/2016-17/content/bp1/html/bp1_bs5-01.htm].
Expenses in assistance to the aged is expected to grow by 3.5% in real terms between 2015-2016 and 2016-2017. The principal driver of this growth is income support for seniors which is estimated to grow by 3.3% from 2015-2016 to 2016-2017, reflecting demographic changes. http://budget.gov.au/2016-17/content/bp1/html/bp1_bs5-01.htm
Yet, despite this increased burden in income support to the aged, dramatic changes have been made to superannuation to “improve the sustainability, flexibility and integrity of the superannuation system”. Apparently “confidence in the superannuation system will be increased by reducing the extent that superannuation is used for tax minimisation and estate planning purposes”.
However, the question that must be asked – if you limit the amount that people can put into super, then how are they supposed to adequately provide for their retirement without reliance on government assistance? These new limits will definitely make it that much harder for many who have inadequate super balances to effectively catch up, who would have been able do so under the previous contribution rules.
Infrastructure
The Budget has provided for a number of large infrastructure projects, largely across Victoria, Queensland and Western Australia.
The government is committing to the Melbourne to Brisbane Inland Rail, providing $594 million to acquire land for the rail corridor. An additional $115 million has been committed to preparing a Western Sydney airport at Badgerys Creek, $490 million being provided to Forrestfield-Airport Link and $261 million for section 2 of the Perth Freight Link, along with $200 million to the Ipswich Motorway.
The Government will provide $8.8 billion to the NBN in 2016-2017. The Government’s equity contributions are capped at $29.5 billion.
Defence
Investment in defence will be made to the tune of $195 billion over the next decade, including 12 new submarines, 9 future frigates and 12 offshore patrol vessels. An additional $345 million increase will be made in 2016-2017 to continue Australia’s military contribution to the international effort in Iraq and Syria.
Hospitals and schools
By comparison, public hospital services will receive an additional $2.9 billion over 3 years (with growth capped at 6.5% pear year), and schools will receive an additional $1.2 billion between 2018 and 2020 (funding growing by 3.56% per year). NDIS spending is expected to increase substantially over the next 4 years as the NDIS is fully rolled out, with the deficit of spending over the additional 0.5% Medicare Levy revenue resulting in a shortfall of $4.4 billion each year for the future – this deficit will be funded from general budget revenue or borrowings.
Some options for savings in the future
If the government ever got desperate for some large savings, consider the estimate cost of the following measures on the Budget:
- CGT main residence exemption – $54.5 billion
- Concessional taxation of super contributions and earnings – $30.3 billion
- GST on Food, Education, Health etc. – $22.61 billion
- Capital gains tax discount for individuals and trusts – $6.94 billion
[Table A1, Statement 4: Revenue – Estimates of large measured tax expenditures]
Future Fund financial performance
And finally, if anyone is worried their investments aren’t doing well this year, then consider this – the Future Fund has returned just 0.2% this financial year to date [http://budget.gov.au/2016-17/content/bp1/html/bp1_bs6-02.htm] (the average return since 2006 is 7.4% p.a.). Apparently even the best fund managers in the country are having a hard time of it!
Individuals and Families
Despite the vast number of announcements, there is not a lot of news for individuals in this year’s Budget.
Families
- For families, the implementation of the Child Care Subsidy, Additional Child Care Subsidy and Community Child Care Fund will be deferred by one year to 1 July 2018. This is explained as being due to Family Tax Benefit reforms not being passed by the Senate.
- The government will provide an additional $118.2 million over 2 years from 2016-2017 in support for school students with a disability, targeted to those schools with the greatest need.
Individuals
- For individuals, the second top tax bracket threshold will increase from 1 July 2016 from $80,000 to $87,000, leaving those under $87,000 on a 32.5% tax rate. For those earning $87,000 or over, this will provide a total maximum saving of $315 per year, or $6.05 per week.
- For those who visit the doctor, the government will be extending the pause on indexation of Medicare Benefits Schedule fees for all services provided by general practitioners, medical specialists, allied health and other health practitioners until 30 June 2020. This will save $925.3 million over two years from 1 July 2018.
- For those who are on higher incomes, indexation of the Medicare Levy Surcharge and Private Health Insurance rebate thresholds will be paused. This extends the current pause for a further three years, which will save $744.2 million from 1 July 2018.
Jobseekers
- For young people looking for work, the Budget provides $751.7 million over four years from 2016-2017 to establish a Youth Jobs PaTH (Prepare Trial Hire) program for young job seekers aged under 25 years to improve youth employment outcomes. This will provide training, internships and ongoing employment along with wage subsidies to employers and financial incentives to job seekers to participate.
The government will also reform the Work for the Dole scheme, which will save $494.2 million over 4 years. From 1 October 2016, job ready job seekers will move to Work for the Dole after 12 months of jobactive, rather than the current 6 months.
Businesses
In this year’s Budget, the government have released what they call a “Ten year enterprise tax plan to promote growth and employment”.
Companies
The company tax rate for companies with turnover under $10 million to be lowered from 28.5% to 27.5% from 1 July 2016. This tax rate will then extended to all companies by 2023-2024. Further annual reductions in the company tax rate of 1% per year will then reduce the tax rate for all companies to 25% by 2026-2027. Franking credits will be able to be distributed in line with the rate of tax paid by the company making the distribution.
Small Business concessions
The small business turnover threshold is set to be increased from $2 million to $10 million per year from 1 July 2016. This will enable another 90,000 to 100,000 businesses to access the small business concessions, such as increased depreciation, immediate write-off of assets under $20,000 and simplified . The $2 million turnover threshold will be kept for access to the small business CGT concessions.
The unincorporated tax discount is to be increased from 1 July 2016 from 5% to 8% for businesses with turnover less than $5 million, capped at $1,000. The tax discount will be further increased to 16% in stages by 2026-2027.
Tax Integrity Package
A range of initiatives have been released in relation to multinational corporations:
- A new diverted profits tax – aimed at multinational corporations that artificially divert profits from Australia
- Deferred tax liabilities and deductible liabilities used in consolidation regime – will remove double tax benefit when entities join or leave a consolidated group. Start also deferred from 14 May 2013 to 1 July 2016
- Strengthening transfer pricing rules
- increasing administrative penalties for significant global entities
Financial Services reform
An additional $121.3 million provided to ASIC to combat misconduct in Australia’s financial services industry and bolster consumer confidence in the sector. This follows a recent inquiry into the sector following widespread scandals relating to financial planners, particularly those working for large banks.
Superannuation
The biggest changes in this year’s Budget have been in the area of superannuation. These changes will no doubt leave a lot of self-funded retirees, and particularly those who are close to being so, upset with the impact of the changes. Those on lower incomes, and those who have a break from the workforce, may find some benefit in other new rules to be introduced.
Limit on tax free income in pension phase
From 1 July 2017, a $1.6 million cap will be introduced on the total amount of superannuation that can be transferred into retirement phase accounts. Subsequent earnings on these balances will not be restricted.
This change will essentially limit the tax-free benefits of retirement phase accounts to the $1.6 million level. Where an individual accumulates more than $1.6 million, the excess amount can be maintained in an accumulate account where earnings will be taxed at 15%.
Members already in retirement phase with balances above $1.6 million will be required to reduce their retirement balance to $1.6 million by 1 July 2017. Excess balances may be converted to superannuation accumulation phase accounts. Amounts that are transferred in excess of the $1.6 million cap will be taxed, similar to the tax on excess non-concessional contributions.
Division 293 tax – additional tax on superannuation contributions
The threshold at which concessional contributions are taxed an additional 15% is set to be decreased from $300,000 to $250,000 from 1 July 2017. This will then result in more people having to pay higher tax on their superannuation contributions, further reducing the benefits of contributing to superannuation.
Concessional contributions limits
The concessional contributions cap is set to be reduced to $25,000 per annum from 1 July 2017. This will reduce from the current levels of $30,000 for those under age 50, and $35,000 for those over age 50.
Non-concessional contributions limits
A new lifetime cap on non-concessional contributions of $500,000 will be introduced. This new limit will take into account non-concessional contributions made on or after 1 July 2007, and commences on 3 May 2016. Contributions made before 3 May 2016 cannot result in an excess, however excess contributions made after 3 May 2016 will need to be removed or they will be subject to penalty tax. The cap will be indexed to average weekly ordinary times earnings.
NOTE: For anyone who has taken advantage of the 3 year bring forward rule to contribute 3 year’s worth of non-concessional contributions after 1 July 2007, this rule change will effectively freeze out any possibility of those members making further non-concessional contributions in their lifetime.
Removal of tax exemption on Transition to Retirement Income Streams
From 1 July 2017, the tax exemption on earnings of assets supporting Transition to Retirement Income Streams will be removed. The changes will also remove a rule that allows individuals to treat certain superannuation income stream payments as lump sums for tax purposes.
Low Income Superannuation Tax Offset
A new Low Income Superannuation Tax Offset will be introduced from 1 July 2017, to effectively reduce the tax rate on superannuation contributions to zero for low income earners. A non-refundable tax offset up to a cap of $500 will be given to super funds, based on concessional contributions made on behalf of members with adjusted taxable income up to $37,000 that have had a concessional contribution made on their behalf.
Extending the ability to make superannuation contributions
New rules will allow all Australians under age 75 to claim a tax deduction for personal superannuation contributions made to en eligible fund. This change will allow all individuals, regardless of their employment arrangements, to make concessional superannuation contributions up to the concessional cap.
This will especially useful for those who are employed, but are not able to salary sacrifice but want to make additional contributions to superannuation (subject to the new limits listed out above!). People under the age of 75 will no longer have to satisfy a work test to make superannuation contributions, and will be able to receive contributions from their spouse.
Rollover of unused concessional contribution caps
Individuals with superannuation balances less than $500,000 will be allowed to rollover unused concessional caps for to allow those with interrupted work arrangements to make catch-up superannuation contributions. This new rule will apply from 1 July 2017.
Amounts are carried forward on a rolling basis for five consecutive years, and only unused amounts accrued from 1 July 2017 can be carried forward.
Increase in threshold for low income spouse contribution tax offset
From 1 July 2017, new rules will increase access to the low income spouse contribution tax offset by raising the income threshold from $10,800 to $37,000.
Remove of anti-detriment provision
The Anti-detriment provision is to be removed from 1 July 2017. This rule applies where dependents receive superannuation benefits that had previously been taxed.
Wrap-up
This year’s budget is pinned on the plans and hopes of creating more jobs by reducing the tax burden on companies and businesses, in turn providing more money for investment into growth.
At the same time, a small tax cut for those earning more than $80,000, and some benefits for lower income earners and those who take a break from the workforce who want to contribute to super.
On the flip side, self funded retirees, and those who had planned to be and were contributing large sums to super will find themselves re-evaluation their plans.
On a high level, it remains to be seen if the forecast of increased tax revenues and estimated savings will come through in the next few years, as these forecasts are what underpin the forecast reduction of the deficit.
Some other interesting announcements in the Budget
Deer Levy – the government will cease the excise levy on domestic production and sale of deer velvet
National Carp Control Plan – $15 million over three years to enable the coordinated release of a carp bio-control agent in the Murray Darling Basin by the end of 2018 (you may have seen the vision of Barnaby Joyce talking about carp in Parliament).
Passport costs increasing – $20 for adults and $10 for children and seniors, and priority processing will increase by $54.