Federal Budget Review – 2013
Few winners were expected in this year’s Budget and, to that end, there have been no surprises.
At a time when the economy needs certainty and clear direction from government to encourage business investment, and in light of the pending federal election, this Budget might simply become a footnote to the history of the current government.
In part, the Government’s new spending measures do support its focus on long-term job creation, and its commitment to offset new spending with savings shows a degree of budget discipline. However, the offsets identified in this Budget tip the balance heavily towards revenue-raising (through taxation) over cuts to spending, running counter to the Government’s priority to foster economic growth.
The Government has funded its key policy reforms and priorities, providing $9.8b for the National Plan for School Improvement (Gonski), $19.3b for DisabilityCare Australia, $1b for A Plan for Australian Jobs, and $24b for the second stage of the Nation Building Program (of which $3.1b is new funding over the forward estimates).
However, to help fund these spending commitments, $43b in revenues and savings measures have been identified, which will hit families, businesses and innovation. Note 60% of these savings will be derived from new taxes.
Revenue measures include: raising the Medicare Levy ($11.5b); changes to the corporate tax base ($4.2b); and deferring the Clean Energy Future tax cuts.
Savings measures include: abolishing the baby bonus; changing family payments to pause indexation and not proceeding with an additional increase to Family Tax Benefit Part A (together, around $4.9b); and deferring the aid budget growth target from 2016-17 to 2017-18.
But what really matters for the future of the Australian economy is how the Government responded to the current economic situation in the Budget.
On the plus side, the big spending commitments, particularly to support the National Disability Insurance Scheme (NDIS) and the Gonski reforms, are both bold reforms that will pay off in the long-term, and even enjoy that rarest of things, a degree of cross party support.
The spending cuts, though modest in the context of the bigger picture, are brave in an election year and do roll back some generous entitlements.
The forecast deficit in 2013-14 is $18b. Economic growth is forecast to be 2.75%, unemployment 5.75% and inflation 2.25%.
The Royal Commission into Child Sexual Abuse with receive $434.1 million of funding over four years.
Introduction of DisabilityCare Australia
The significant reform is the introduction of DisabilityCare and the increase in the Medicare Levy by half a percentage to help fund it. The Medical Levy will increase from 1.5% to 2.0% from 1 July 2014, which in effect increases the top marginal rate to 47% for taxable income over $180,000.
Personal Income Tax
Proposed tax cuts to take effect in 2015-16 (with the tax free threshold rising to $19,400) will be deferred until the carbon price is projected to be above $25.40 in the Budget. This is essentially estimated to be in 2018-19.
The personal tax rates for 2013-14 are:
Net Medical Expenses Tax Offset phase out
The government will phase out the net medical expenses tax offset (NMETO) with transition arrangements for those currently claiming the offset.
Currently people can claim up to 10% of medical expenses over $5,000. There will be a 2-step phase out. Taxpayers who claimed the offset in 2012-13 will be able to claim it in 2013-14. Taxpayers who claim the offset in 2013-14 will be able to claim it in 2014-15. However, an offset can only be claimed by such taxpayers from 2015-16 for medical expenses relating to disability aids, attendant care or aged care.
Consequently, taxpayers who do not claim the offset in 2012-13 cannot claim it in 2013-14 or later income years – except if the net medical expenses relate to disability aids, attendant care or aged care.
Reforms to work-related self-education expenses
Deductions for work-related self-education expenses will now be capped at $2,000 per annum from 1 July 2014.
The Budget confirmed measures previously announced by the government, increased contributions tax for high income earners, and clarified minimum pension payments.
Contributions tax on Super Guarantee
Draft legislation introducing a higher contributions tax of 30% rather than 15% on Super Guarantee contributions for those with adjusted taxable income over $300,000.
Minimum Pension Payments
In response to the downturn in global financial markets, the government provided pension drawdown relief in 2008-09, 2009-10 and 2010-11 by halving the minimum payment amounts. This relief was extended in 2011-12 and 2012-13 by reducing the minimum payment amounts by 25 per cent.
As a result of the Budget being silent, it is expected that the minimum payment amount is to return to normal in 2013-14. Hence from 1 July 2013, the minimum pension payments will be:
Superannuation Income Streams
The tax free status of retirement phase earnings will be retained, but capped at $100,000 (indexed by CPI in $10,000 increments) attributed to each individual member. Annual earnings above $100,000 will be taxed at a concessional rate of 15 per cent, in the hands of the fund.
Capital gains tax will apply to assets (in pension phase) if purchased after 1 July 2014. Special arrangements will apply for capital gains on assets purchased before 1 July 2014:
- For assets that were purchased before 5 April 2013, the reform will only apply to capital gains that accrue after 1 July 2014;
- For assets that are purchased from 5 April 2013 to 30 June 2014, individuals will have the choice of applying the reform to the entire capital gain, or only that part that accrues after 1 July 2014; and
- For assets that are purchased from 1 July 2014, the reform will apply to the entire capital gain.
This reform will not affect the tax treatment of withdrawals. Withdrawals will continue to remain tax-free for those aged 60 and over, and face the existing tax rates for those aged under 60.
Concessional Contribution Caps
The Government has decided to scrap the $50,000 concessional cap linked to super balances under $500,000. This will be replaced with an unindexed $35,000 concessional cap. From 1 July 2013, this will apply to all individuals aged 60 and over. From 1 July 2014 this will apply to individuals aged 50 and over. Legislation for this measure is expected to be tabled in Parliament this week.
Abolishing the Baby Bonus
New family payment arrangements will replace the Baby Bonus from 1 March 2014. The Baby Bonus will no longer be available.
From 1 March 2014, families eligible for the Family Tax Benefit (FTB) Part A will receive an additional loading on their family payments when they have a new baby to help with upfront costs (if they are not accessing the Paid Parental Leave Scheme). The extra FTB Part A payments for families will total $2,000 for their first child and $1,000 for subsequent children.
Targeting trust tax avoidance
The Government will provide the ATO with $67.9 million to investigate and audit the use of complex trust structures by high wealth individuals to avoid and evade tax. Expect stronger ATO compliance activities following additional funding.
New 10% withholding tax
From 1 July 2016, a new 10% non-final withholding tax will apply to foreign residents disposing of Australian real property assets held on both capital and revenue accounts. The purchaser will have the withholding obligation. Residential property transactions under $2.5m or disposals by Australian residents are excluded.
This will potentially disrupt cashflows at completion. The consultation, involving a discussion paper by the end of 2013, will need to consider processes to quickly calculate actual profits and the resulting tax liabilities, as well as purchasers’ obligations to identify relevant transactions.
HELP Discounts to be Abolished
From 1 January 2014, the Federal Government will remove discounts applying to the upfront and voluntary payments made under the Higher Education Loan Program (HELP). These discounts are the 10% discount available to students electing to pay their student contribution upfront and the 5% bonus on voluntary payments of $500 or more.
Health care measures
- $226 million to improve cancer prevention, detection, treatment and research, and improve patient care and support.
- $33.8 million investment into the General Practice Rural Incentive program in 2013-14 to encourage medical practitioners to move to regional and remote communities.
- $691 million over five years in new listings or amendments to the Pharmaceutical Benefits Scheme.
New costs from PAYG changes
Changes to the PAYG income tax instalment system will increase compliance costs and adversely impact cashflow for all large entities, which will be required to lodge monthly. The start dates are from 1 January:
- 2014 for corporates with turnover of more than $1 b
- 2015 corporates with $100m+ turnover
- 2016 for corporates with $20m+ turnover and all other investors (e.g. super funds, sole traders) with $1b+ turnover
- 2017 for all other investors with $20m+ turnover.
Author: Rick Walker
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