The first budget for the Coalition Government was mild and had few surprises. It sets a course for a balanced budget in five years by addressing spending and asking Australians to pay their own way from cradle to grave.
There is little in the way of tax reform pending a report due before the next election. Many commentators see GST reform as critical rather than ongoing reliance on punitive personal income tax rates. Efforts to boost growth include a new infrastructure package, the new Medical Research Future Fund and reforms to tertiary education.
The Budget is set in the context of slightly below trend growth for the Australian economy, which may be too pessimistic. Treasury expects elevated unemployment and weak business investment, particularly in the resources sector. Real GDP is estimated to grow by 2.5% in 2014-15, gradually increasing to 3.5% in 2017-18.
It is important to note the Budget announcements are still only proposed at this stage and that, to be legislated under the new Senate, the Government will need the support of six of the record 18 crossbench Senators. Key matters are detailed below.
Temporary Budget Repair Levy
- A 2% levy applies from 1 July 2014 to 30 June 2017 (3 years) for individuals with taxable income over $180,000, which equates to approximately 400,000 taxpayers. Make no mistake, this is a tax increase.
- The amount of the levy for various taxable income levels is:
- $400 levy for $200,000
- $1,400 levy for $250,000
- $2,400 levy for $300,000
- $6,400 levy for $500,000
- The highest marginal tax rate will now be 49% which kicks in at $180,000 of income. This comprises the 45% based marginal tax rate, plus 1.5% Medicare levy, plus 0.5% DisabilityCare Australia insurance scheme levy plus 2% Budget Repair levy.
- The rate of Fringe Benefits Tax (FBT) will also increase to 49% to prevent high income earners from using fringe benefits to avoid the levy. The increase in the FBT rate will be from 1 April 2015 to 31 March 2017 to align with the FBT year.
- The Government has announced that the superannuation guarantee (SG) rate will increase from 9.25% to 9.5% from 1 July 2014, as currently legislated.
However, the Government proposes to amend the schedule for SG to increase to 12% by freezing the SG rate at 9.5% from 1 July 2014 until 30 June 2018, and subsequently increasing the SG rate every year by 0.5% until it reaches 12% from 1 July 2022. This represents a 3 year delay compared to existing legislation.
- In a welcome measure, the Government has proposed that individuals will have the option to withdraw contributions (and associated earnings) made from 1 July 2013 that exceed their non-concessional contributions cap. The earnings will be assessed as part of the individual’s assessable income and taxed at their marginal tax rate. Final details of the policy will be settled following consultation with key stakeholders in the superannuation industry.
This proposal is good news as it will mean that clients who inadvertently exceed their non-concessional cap will have the ability to withdraw the excess amount rather than have it taxed at the top marginal rate.
- The annual non-concessional contribution cap will increase from $150,000 to $180,000 from 1 July 2014.
Company Tax Rate
- The company tax rate will be reduced by 1.5% to 28.5% from 1 July 2015. For companies earning more than $5 million in taxable income, this reduction will be offset by the 1.5% levy to fund the paid parental leave scheme which also commences from 1 July 2015.
- With the reduction in the company tax rate, investors in companies earning less than $5 million may receive greater dividends but less franking credits, leaving them in the same net after tax position.
- However, for shareholders of companies with income of more than $5 million, the 1.5% reduction in tax will be offset by the 1.5% levy for the paid parental leave scheme. As a result, shareholders may receive the same level of dividends but less franking credits (assuming the levy is not franked), leaving them worse off.
Commonwealth Seniors Health Card
- Many self-funded clients of APW Partners currently have this card to access medicines listed on the Pharmaceuticals Benefits Scheme at a concessional rate as well as other concessions.
- To be eligible, a couple must have adjusted taxable income of les than $80,000, or less than $50,000 for singles. To date, account based pensions received from super funds have been excluded from the adjusted income amounts.
- It is proposed that account based pensions will be included in the income test from 1 January 2015. However, grandfathering applies to holders of a card as at 1 January 2015 with a pension commenced prior to that date. However, if you change your pension fund, this may impact your ongoing eligibility.
- The Government has announced it will deregulate the higher education sector and from 1 January 2016 will allow higher education providers in Australia to set their own tuition fees. This is likely to increase the cost of education in Australia.
- The Government will continue to provide students a way to defer costs of study through HELP and graduates will begin to repay the debt only once their income reaches $50,638 from 1 July 2016.
- Additionally, the interest rate applied to HELP debt will be linked to the ten year Government bond rates, instead of its current linkage to CPI, but will be capped at 6%.
Paid Parental Leave
- The government will proceed with the paid parental leave scheme from 1 July 2015. Under the scheme mothers will receive up to 26 weeks of salary up to a cap of $100,000 per annum. This translates into a maximum payment of $50,000 over the 26 week period. This scheme will be funded via a 1.5% levy on companies earning taxable income over $5 million.
Doctor (GP) consultations
- From 1 July 2015, previously bulk-billed patients can expect a charge of $7 per visit towards the cost of standard GP consultations and out-of-hospital pathology and imaging services. For concessional patients and children under 16 years, the contribution will be limited to the first 10 visits each calendar year.
- The higher GP fees will help pay for a proposed Medical Research Future Fund (MRFF) from 1 January 2015 to provide additional funding for medical research. Investments in the MRFF will be managed by the Future Fund Board of Guardians with a target capital level of $20 billion.
- Age pension age will increase to 70 by 2035. This applies to those who are currently aged 48 years and younger.
- The asset and income test thresholds for aged pension eligibility will be frozen for 3 years from 1 July 2017. Payments will also be indexed to inflation rather than wages from September 2017, which is expected to reduce pension increases. The Budget assumes inflation will be between 2.25% and 2.50% pa over the medium term.
- Due to lower than forecast take-up rates, the First Home Saver Accounts scheme will be abolished after only 46,000 accounts were opened. New accounts opened from Budget night will not be eligible for concessions, with the Government co-contribution to cease from 1 July 2014. Existing funds will continue to receive the co-contribution.
- The Government has reinforced its promise to repeal the Minerals Resource Rent Tax (MRRT) and Carbon Tax.
- The Government will re-introduce biannual indexation by the Consumer Price Index of excise and excise-equivalent customs duty for all fuels except aviation fuels from 1 August 2014. This will raise $2.2B over four years. Higher petrol prices for motorists will secure funding for additional productivity enhancing road infrastructure projects to build new and upgrade existing road infrastructure.
- A $484.2m Entrepreneurs’ Infrastructure Program that will provide loans of up to $20,000 to small business.
- Public service will lose 16,500 people over four years, 230 programmes and 70 boards.
- Abolishment of the Dependent Spouse Tax Offset and the Mature Age Tax Offset from 1 July 2014.
- After consideration, the Government has not imposed any tax of the Not For Profit (NFP) sector.
Author: Rick Walker & Greg Keady