Federal Budget 2016 – Report Card
There are hundreds of columns and articles floating around regarding Federal Budget Commentary and Analysis. Rather than rehashing all of them we thought we share with you what stood out for us.
The super system saw some increased flexibility introduced.
- Removal of the work test for those aged between 65 and 75, which means that anyone under the age of 75 is allowed to make contributions to super
- Introduction of a catch-up system for those whose super balance is below $500,000. Individuals will be able to make additional contributions to super, if they have not used up all their concessional contribution cap in the past 5 years (eg cap on the employer SG, salary sacrifice and deductible contributions that can be contributed each year). While the yearly cap is lower than the current cap, this is expected to negatively impact only 4% of super fund members.
- Introduction of the ability for anyone to claim tax deductions (allowing for the contribution cap restrictions) regardless of their work status. Opening up the equivalent tax concessions provided by salary sacrifice to those who may not be employed or have salary sacrifice made available by their employers.
- A lifetime limit on after-tax contributions to super has been set at $500,000 (commencing from the time the budget was delivered 7:30pm 3 May 2016). This is more flexible, though less generous than the current rules which allow $180,000 per annum. The increased flexibility reduces difficulties that some members face due to the timing issues and the reduction in maximum amount that can be contributed is expected to impact less than 1% of super fund members.
Benefits for lower income earners:
- The rebates to low income earners on super contributions has been retained, albeit by another name. This is very positive as it protects low income earners from the perverse situation of paying more in contributions tax than they would pay in income tax.
- The extension of the threshold for rebates on spouse contributions was also positive. The spouse receiving a contribution can earn up to $37,000 (currently $10,800) and allow their partner to receive a tax rebate. In practice this means that the spouse contributions becomes eligible not just to home makers, but to women who are working part-time and whose SG is substantially lower than their partner.
Paying a fair share:
- The introduction of the ‘Google tax’ is a start along the way to trying to get large multinationals to pay their fair share, it’s pretty hard to defend a situation where a multibillion dollar company pays less tax than the average wage earner
- Similarly the introduction on GST on low value imported items is probably a step in the right direction. Not only collecting additional revenue, but levelling the playing field a little for domestic retailers trying to compete against foreign internet based companies
- The introduction on limits on the amount of money in super pensions is a good thing. $1.6 million is a fairly generous superannuation pension and retirees can have this money invested and pay zero tax on the investment earnings. Any amounts above this will need to be withdrawn or retained in the accumulation system, where they attract a 15% contributions tax. According to the Government Budget papers, less than 1% of super fund members have a balance this high.
- Those with incomes are between $250,000 and $300,000 will pay an additional 15% tax on their contributions to super (previously this applied only to those whose income incomes were above $300,000). Once again this is quite reasonable, they still get a very good deal out of super, with substantial discounts to income tax rates.
- The changes to tax on earning in the Transition to Retirement Income Streams is less than ideal. While a number of high income earners have been the major beneficiaries of this tax concession, there is a substantial number of middle income earners utilising this strategy to help build their retirement savings in the last few years of their working lives. For example a client who earns $45,000 pa with under $150,000 in super will lose tax benefits in the vicinity of about $750 per annum. While many of the super treatments are well targeted to high income earners this is one that is has some unfortunate ramifications. We would have liked to have seen this policy use a cap on the amounts going into these income streams or caps on incomes for those who can use this strategy rather than the current approach.
- Pushing back the date on raising the threshold for childcare rebates, increases the cost and viability of middle income women returning to the workforce or participating as fully as they would like
- The risk to public health prompted by the freezing of Medicare and pathology rebates, despite assurances of a deal with pathologists this is still at risk.
- The changes to the Child Dental Health scheme, which while on the face of it looking generous and open to more people, when dug deeper appears to be a way to engineer its failure and reduction in access by requiring the services to be performed in the public dental system.
For all the hoo-ha around the change to personal tax rates, you would be hard pressed to find anything as ineffectual as the change to the 32.5% tax rate. The effect on the budget was fairly minimal, it doesn’t affect the majority of the population, and those who receive the full benefit are those who earn over $87,000 per year and the total benefit they will get is $315 per year, less than the price of coffee and a biscuit per week in the CBD. Its sole purpose appeared to be to stop the Australian average weekly wage tip into the second highest marginal tax bracket. Not expected to drive any real growth in economic activity, not targeted at those for whom $315 per year would make a difference, it seems to be a purely political measure, and one so transparent that I am left wondering what the point was.[Addendum: while I originally thought this to have some amusement value, I have now rethought that position. I have been troubled by the particularly vicious treatment by some media publications of the gentleman on Q&A who questioned why the tax cut was applied to the higher income earners instead of lower income earners. The harsh reality is that the government may not be able to afford to give that sort of benefit to lower income earners who would most appreciate it, there are just so many more of them. The question still remains ‘could something better could have been done with that money?’
The larger question remains for me though, how can we function as a democracy, if a person cannot raise a reasonable question, rather well articulated and argued, without the risk that their most sensitive personal details be dug up and raked through the mud.]
We are left wondering:
What an earth is going on with the government’s assessment of the increase in the threshold for rebates on spouse contributions. As discussed above, spouses will now be able to get a tax rebate (up to $540) if their spouses earn up to $37,000 (now currently $10,800). Interestingly though a look into the budget papers indicates that they only expect a small number of people to take this up. They have estimated about 5,000 individuals across the whole of Australia (and have budgeted for 9,000 individuals) but I honestly can’t understand how they would come up with numbers so small. I guess we will have to wait and see.
Good question, with the exception of the lifetime contribution cap (which applied from the moment the budget was released) most of the measures are due to come into effect from 1 July 2017. However, many of the measures will need to be introduced to parliament through legislation, which does open up a degree of uncertainty. If the Turnbull Government is re-elected, will they have enough seats in the upper and lower house to get them through parliament? Alternatively, if a Shorten Government is elected what then? In contrast to the Abbot Government budgets, it is unlikely that these measures will be a vehemently opposed, so it’s probably best to assume that they will be going ahead and keep an eye on the ones that particularly apply to you.
Federal Budget – Net result?
Looking primarily at the changes to super, the net result of the budget positive, I give it a B+. Our superannuation system is meant to encourage everyday Australians to save for their own retirement, to reduce the burden on the Age Pension safety net. Most of the measures in the budget increase access and equity in the system, providing encouragement within limits and removing some of the loopholes that allowed the most wealthy to shelter excessive wealth in super avoiding paying a fair share of income tax.
There is of course much still to be done to make the tax system fairer and provide a better outcome for the country and the individuals, not to mention reforms to social justice and equity of economic opportunity and participation. However from a retirement savings perspective the government estimates that 95% of the population will be better off by the budget changes and those who are worse off are the top 5%. From a superannuation point of view and with a few caveats I think that’s about right; unfortunately when you add in the impact of taxes as a whole, support for health, education and childcare services and the impact of social security changes that have occurred over the last few years I think we need to deduct marks down to a C-.