The Value Add – 2013 Budget Edition
Listen in to 612 ABC Wednesday morning at 8:30am, as Ian Wood talks with Steve Austin about the Budget and what it means for households.
Much of the Budget announcements tonight were already expected, as a lot of the measures had already been released in prior weeks.
Despite that, the budget deficit was larger than expected at $18 billion, there were cuts to welfare payments such as the baby bonus and Family Tax Benefit Part A, and more money invested into schools and infrastructure, as well as the establishment of the National Disability Insurance Scheme.
Lower corporate profitability and lower than expected resource rent taxes have impacted both this budget, and the forecasts for future years – see graph below. The high Australia dollar together with falling commodity prices has impacted the resources and export industries, which in turn has impacted tax receipts. This, combined with spending initiatives, has seen the budget stay in deficit despite previously forecast surpluses.
Revenue write-ups and write downs. Source: Statement 4 of Budget 2013-2014
Despite these negative circumstances, unemployment remains low at 5.5%, the official cash rate is at 2.75%, and inflation at an even lower rate of 2.5%. Interestingly, despite all the negativity, the economy is also now more than 13% larger than in late 2007.
But what does it all mean to households and businesses? How will you be personally affected by the budget and its announcements? Read on to find out!
If you have any questions or concerns about anything contained in this update, please contact us to discuss.
For Households
Generally, the news in this budget is one of taking away rather than giving. Deferral of future planned tax cuts, an increase in the Medicare Levy, removal of the Medical Expenses Offset, limiting self-education expenses – one could wonder if there was anything good in the budget!
There have been some improvements to the taxation of superannuation – however this must be compared to the changes that were made in the last 2 years which removed some of the concessions which previously existed.
Most of the cuts have been redirected into 3 main areas: Primary school education, the National Disability Insurance Scheme, and infrastructure projects under the “Nation Building Program”.
Personal income tax cuts deferred – personal income cuts scheduled to commence on 1 July 2015 (increase in tax free threshold) will be deferred due to revisions in the carbon price projections. The new estimate for the carbon price is now less than half the previous estimate.
Increase in the Medicare Levy – Medicare Levy to increase from 1.5% to 2.0% from 1 July 2014. The current exemptions and low-income relief will still apply. This additional revenue is to provide funding for DisabilityCare Australia (part of the NDIS).
Net Medical Expenses Tax Offset – The tax offset will be phased out through to 1 July 2019. From 1 July 2013, those who claimed the NMETO in the 2013 income year will continue to be eligible in the 2014 if they have eligible expenses above the thresholds. The changes mean that you will not be eligible for the offset from the first year that you aren’t able to claim it.
Family Tax Benefit – The government will maintain the higher income thresholds for Family Tax Benefit (FTB) at their current levels until 1 July 2017. This will leave the upper limit of FTB Part B at $150,000, and the FBT Part A upper income threshold will remain at $94,316. FTB payment amounts will also remain at the current levels.
Beginning with 2012-13, FBT or Child Care Assistance (CCA) claims must be lodged within 12 months of the end of the financial year, rather than the current 2 years. This is to bring the claims in line with lodgement of tax returns.
No further increases to FTB Part A payments – Due to the revenue write-downs, the government will not proceed with increasing Family Tax Benefit Part A as previously scheduled in last year’s budget. There will be increases to FTB Part A and B from 1 July 2013 as part of the Household Assistance Package, and the second Schoolkids Bonus payment will be delivered in July.
Baby Bonus removed – The government will increase FTB Part A payments by $2,000 to be paid in the year following birth or adoption of a first child or each child in multiple births, and $1,000 for second or subsequent children. This will replace the Baby Bonus from 1 March 2014.
Childcare rebate – The Government will continue to pause the indexation in the annual cap of the Child Care Rebate (CCR) for a further 3 years. The maximum amount that can be paid will be $7,500 per year until 2017.
Seniors downsizing homes – A means test exemption of up to $200,000 will be provided for seniors downsizing their homes. The home must have been owned for at least 25 years, with 80% of the proceeds to be deposited into a special account. These funds and earned interest will be exempt from pension means testing for up to 10 years provided no withdrawals are made during the life of the account. A pilot will commence 1 July 2014.
Self-education expenses – An annual cap of $2,000 on work-related self-education expenses will apply from 1 July 2014. Employers will not be liable for FBT on these expenses, unless an employee salary sacrifices to obtain these benefits.
Removal of discounts on HECS/HELP payments – The discounts on up-front and voluntary repayments under the Higher Education Loan program (HELP) will be removed from 1 January 2014. These savings will be redirected to the Better Schools package
Foreign resident Capital Gains Tax – The government will introduce a non-final 10% withholding tax on the disposal of certain taxable Australian property by foreign residents from 1 July 2016. This will not apply to residential property transactions under $2.5 million, or to disposal by Australian residents.
Excess super contributions made fairer – Excess contributions to super funds will be taxed at the individual’s marginal rate, plus an interest charge, to make it fairer and give individuals greater choice. This will apply to excess contributions made from 1 July 2013.
Superannuation contributions – Concessional contributions cap increase to $35,000 for people aged over 60 from 1 July 2013, and for all people aged over 50 from 1 July 2014
Tax exemptions on pension earnings – Super funds paying pensions will have the income tax exemption on earnings limited to the first $100,000 of income from assets supporting pensions. Earnings above that rate will be taxed at 15% from 1 July 2014.
Lost Super – Lost superannuation accounts must be transferred to the ATO when the balance is less than $2,500 from 31 December 2015, and less than $3,000 from 31 December 2016.
Improving compliance through third party data matching – More funding will be provided to the ATO to improve compliance through data matching with third party information. These sources will include sale of property, shares (including options and warrants) and units in managed funds, sales through merchant facilities, trust distributions, dividend and interest payments.
For Businesses
The government announced again previously announced small business deductions for assets under $6,500 which has been operational since 1 July 2012. A lot of funding has been placed into cracking down on tax schemes, as well as changing the way that taxation of profits of multinationals is dealt with, more particularly their attempts to shift profits offshore, as well as deductions for foreign dividends received in Australia. The estimates are for additional revenue of $4.2 billion from these measures alone.
Generally speaking though, there is not much news in this Budget for businesses. Given the disappointment of last year’s Budget with the deferral small business tax cuts and other measures, maybe the old adage of “no news is good news” holds true.
Addressing aggressive tax structures – The government will tighten and improve the thin capitalisation rules that govern debt deductions for foreign owned entities within Australia, to reduce the tax benefits derived by multinationals that seek to shift profits by artificially loading debt in Australia. They will also remove the tax deduction for interest expenses incurred in deriving certain exempt foreign income.
Closing loopholes in the consolidation regime – integrity of the tax system will be improved by addressing issues relating to consolidated groups, affecting transactions taking place after 14 May 2013. This will be done by amended the law to ensure that double deductions cannot be claimed and other aspects identified by the Board of Taxation.
Research & Development tax incentive – better targeting
The R & D Tax incentive will be removed from companies with turnover greater than $20 billion from 1 July 2013. This measure alone is estimated to save $1.1 billion over the next 3 years.
R & D tax incentive quarterly credits – Eligible entities will be able to claim the R & D Tax incentive on a quarterly basis for each quarter commencing on or after 1 January 2014.
457 visa charges to increase – The Visa Application Charge for a subclass 457 visa will increase from 1 July 2013 to $900.
Monthly PAYG instalments – Corporate tax entities with turnover greater than $20 million will move to monthly PAYG instalments from 1 January 2016; all other entities with turnover greater than $20 million or more will move to monthly instalments from 1 January 2017
Preventing dividend washing – The government will close a loophole from 1 July 2013, that enables sophisticated investors to engage in dividend washing. The current law allows sophisticated investors to effective receive two sets of franking credits for the same parcel of shares.
Target deduction for immediate deduction to genuine exploration activity – new law will exclude mining rights and information from the immediate deduction for the cost of assets first used for exploration. This will apply from 7:30pm on 14 May 2013.
ATO Trusts taskforce – The ATO will be funded to undertake compliance activity in relation to taxpayers who have been involved in “egregious” tax avoidance and evasion using trust structures. The funds will target exploitation of trusts to conceal income, artificially reduce trust income amounts and underpay tax, as well as target known tax scheme designers, promoters, individuals and businesses who participate in such arrangements.
Revised tax treaties for more information – Revised tax treaties with countries like Switzerland will provide the ATO with more access to banking information. This information will help detect tax evasion as well as improve information on potential sources of income which are currently not being taxed.