The Federal Budget was handed down last Tuesday, May 8, 2018. While the measures announced in the budget are yet to be passed by Parliament, we can generally assume that most of the announcements will become reality. From an individual perspective – especially if you do not grow illegal tobacco or participate in the black economy – this year’s budget was actually a bit of a nonevent. For those clients reeling under the complication of the various taxation and superannuation rules that currently exist, this is probably good news. One thing this Budget cannot be accused of is further complicating tax and super.
Last week we gave you the headlines. This week’s article provides a deeper analysis of this year’s Budget and what it might mean for you. Happy reading!
The Budget contains some modest tax cuts. These tax cuts will be rolled out over the next seven years. In summary, the immediate and future changes to taxation present a modest benefit to almost all taxpaying Australians.
Starting from the coming financial year, people earning $90,000 or more per year will pay $135 less in income tax. This reduction is due to a change in tax brackets, such that income between $87,000 and $90,000 will now be taxed at 32.5% rather than 37%. To put this in perspective, a person earning $90,000 is currently paying $20,932 in tax. From next year, that same income will give rise to $20,797 in tax.
In addition, there will be a temporary additional tax offset available to people on low to middle incomes. The maximum offset will be $530 per year. This amount of offset ‘kicks in’ for incomes between $48,000 and $90,000. Incomes below $48,000 receive a lower offset. Incomes between $90,000 and $125,333 also receive a reduced offset. No offset is available for people with incomes above $125,333.
While it is not a change, the Medicare levy will stay at the current rate of 2%. We include this here because the levy was scheduled to increase to 2.5% from 1 July 2018.
Businesses will continue to be able to write off asset purchases for assets up to a value of $20,000 in the year of purchase. This capacity was scheduled to end on 30 June 2018. This measure is only available to businesses with a turnover of less than $10 million. In order to access the immediate deduction, the asset needs to be in place and ready for use by 30 June 2019. Assets that cost more than $20,000 can continue to be depreciated at a faster rate than has historically been the case – something else that was initially expected to end on June 30 2018.
The temporary offset outlined above is proposed to last for four years. From 2022/23 onwards, it will be largely replaced by changes to the various tax brackets at which higher rates of tax become payable. For example, under the current system, income below $37,000 is taxed at 19%. Income above $37,000 starts to be taxed at 32.5%. From 2022/23, this threshold will increase to $41,000. Other brackets will be adjusted as well, with the net effect being less tax payable for all income above $37,000.
Eventually, the number of income tax brackets will fall from the current 5 to 4. Eventually, the new brackets will look like this:
|Tax Rate||Current Brackets(May 2018)||Eventual Brackets|
|0%||$18,200 and below||$18,200 and below|
|19%||$18,201 – $37,000||$18,201 – $41,000|
|32.5%||$37,001 – $87,000||$41,000 – $200,000|
|37%||$87,001 – $180,000||This bracket will no longer exist|
|45%||$180,001 and above||$200,001 and above|
Being so far in the future, these changes will obviously be subject to future Budgets.
There have also been some modest changes to the superannuation sector.
Under current rules, a self-managed super fund can have no more than four members. This will increase to a maximum of six members from 1 July 2019. Existing funds will be able to expand their membership from that date. New funds can start with any number of members between one and six. Single-member funds will continue to need to use a corporate trustee.
There are also some modest changes to the audit requirement for SMSFs. Funds with up-to-date lodgment records, and who have received a clean bill of health for their last three annual audits, can move to a triennial audit. That is, they can instead undergo one audit each three years.
Recent retirees may also benefit from a change to the current work test for voluntary contributions. At present, any person aged between 65 and 74 needs to meet a work test before they can make voluntary contributions into superannuation. The work test is that the person must work at least 40 hours within 30-day period during the relevant financial year.
People with balances below $300,000 will now be exempt from meeting the work test for the first year in which they would not have met that test. In practice, this basically means that people with low balances and who are newly-retired can make a voluntary contribution in the year after they retire.
This is not a huge change, but it will make things a slightly easier for retirees with relatively low balances.
The Black Economy
This part of our analysis will of course be completely uninteresting for all of our clients, none of whom would be involved in the ‘black economy.’
The black economy is that part of the economy that the tax office does not know about – at least officially. Things like cash payments that don’t find their way onto business activity statements. This year’s budget will help the tax office know more about this part of the economy.
One change that may impact (albeit rarely) our business-owning clients is that, from July 1 2019, businesses will not be able to receive cash payments of $10,000 or more. This should make it harder to ‘launder’ money through activities such as gambling.
Illicit tobacco will also be targeted as part of a Government crackdown.