Federal Budget 2019

Good Afternoon,

The Liberal government has now handed down an early Federal Budget as an election fast approaches. This edition has provided a rather vanilla offering with a narrower range of policy changes than past years which is a surprise from a Government under significant pressure to remain in office. Of the list of proposals, there is a number that will have an immediate effect for the financial year 2018/19 (Changes to tax offsets & tax rates/energy assistance payment/instant asset write-down for small businesses) while many of the changes relating to superannuation & future planning are only live from July 2020.

Our commentary is shown (in blue below) on each of the government’s major announcements for a quick overview. As always a more detailed look into the nuts and bolts of the budget is provided in the federal-budget-briefing-paper-2019.

Our analysis has extended to Labor Government policies (Labor Budget Policies-2019‘) given the current political climate and likelihood of there being a change of government if you believe the current poling is accurate. These previously announced proposals that if enacted in the current form will have far reaching impacts on many of our clients overall financial plans and the future strategies that can be employed to build wealth for their retirement/investment.

Please let me know if you have any questions in relation to the budget announcements. NB: All proposals from both the Liberal/Labor parties are contingent on passing through the parliament and the outcome of the federal election and therefore could be subject to change.

Federal Budget 2019 Liberal Government Proposals

Personal income tax

• Increases in the low and middle income tax offset to apply in 2018-19. Critique: This can range anywhere from $55-$580 depending on the level of taxable income earned for the 2018/19 financial year.
• Other tax benefits (tax rates/thresholds and low income tax offset changes) to commence in 2022-23 and later income years. Critique: Page 2 of the attached Colonial briefing outlines how the 19% tax bracket & 32.5% tax bracket will increase in size to eventually capture those earning $18,201-$45,000 and $45,001- $120,000 respectively.

Business owners

• Extension of the provision allowing small business to instantly write-off asset purchases. Critique: This has increased to $30,000 for small/medium sized businesses.
• Further consultation on Division 7A reform.

Superannuation

• Work Test changes (Live from July 2020). Critique: This will allow those aged under 67 to make contributions to super. The current cutoff is age 65 if you do not meet the work test which limits older Australian’s ability to boost their superannuation leading up to retirement.
• Spouse contributions (Live from July 2020). Critique: This will allow spouse contributions to a partner’s super account if they are 66 or younger. The current cutoff is age 65 if your spouse does not meet the work test.
• Bring-forward of the NCC cap (Live from July 2020). Critique: This will allow those aged under 67 to bring forward three years’ worth of super contributions of $300,000 in a one financial year. The current cutoff for this strategy is age 65 and the change would provide greater flexibility for those Australians continuing to work longer and delaying retirement/realisation of assets/downsizing etc.
• Tax relief for merging superannuation funds.
• ECPI administration simplification.

Social Security

• Energy Assistance Payment. Critique: This is a one off payment of $75 for singles & $125 for couples who are in receipt of the Age Pension, Disability Support Pension, Carer Payment and Parenting Payment Single. Also recipients of payments from the Department of Veterans Affairs will be eligible.

Aged care

• Improving the quality, safety and accessibility of aged care services.

Labor Government Policies

Excess imputations credits to be non‑refundable: 1 July 2019 Critique:  This policy will have a negative impact on many retirees if they utilise a Self-managed fund/individually held super account which holds Australian companies paying fully franked dividends. This will also apply to personal shareholdings for those retirees not in receipt of the age pension. A summary of the policy: Franking credits will still be used to reduce tax payments, but the proposed changes would mean that taxpayers will no longer be able to obtain cash refunds for excess credits if they exceed tax liabilities (currently equating to a full refund for investors with no tax liability). The policy will only apply to individuals and superannuation funds, and not to bodies such as registered charities and not-for-profit organisations. Union bodies, as registered charities, have effectively been exempted.
Reducing non-concessional contributions cap to $75,000 Critique: This is a reduction to the current post tax limit of $100K for each individual each financial year. This will limit the ability for clients to contribute to super and boost their account balances.
30% minimum tax rate on discretionary trust distributions Critique: Individuals using family trusts (most small business owners) to distribute income to low earning beneficiaries will not be able to receive a refund of franking credits and will have  fixed tax rate of 30%. This will affect the viability of small business owners who may direct business income to their low income partner/adult children.
Re-establishing 10% test for personal tax-deductible contributions  Critique: This will impact those who are employed for part financial years (ie retirements/ contractor employees) and want to contribute to super to reduce their taxable income. It will also impact those with high taxable income for investments who can utilise super contributions to make their taxable income.
Abolishing concessional contributions cap carry-forward Critique: Clients who have not used their pre-tax contributions could potentially bring these forward to future financial years to allow them to catch up and build up their super balances (working mums).
Reducing Division 293 tax income threshold to $200,000 Critique: Those earning over $200,000 will be hit with another tax. This is currently a tax levied on those earning $250,000 or above of taxable income whereby their super contributions are levied with an additional tax of 15% (on top of the 15% contributions tax).
Prospectively reintroducing ban on LRBAs Critique: Using a Self-Managed Fund to borrow to invest into domestic property will be banned under Labor’s proposals.
Limiting negative gearing to new housing investments Critique: Negative gearing for existing properties will most likely become redundant for new arrangements put in place from 1 Jan 2020.
Halving the 50% CGT discount Critique: Similar to the policy above this change will apply to new investments from 1 Jan 2020 and will reduce the Capital Gains Tax discount from 50% to 25% for assets owned more than 12 months.