Watch our Federal Budget Briefing live

Prosperity Advisers’ National Tax Practice Leader, Stephen Cribb and Director of Financial Planning, Gavin Fernando talk about the real impacts of Federal Budget. 

With so many of our clients so busy running businesses, and in locations all over the country we have this year put together a recording of our Federal Budget Briefings in a video recorded on Google Hangouts.  If you were unable to attend these briefings, click on the image below to watch it live on our blog site.

PART ONE

PART TWO

Federal Budget 2014 – “Lifters not leaners”

An old proverb says “people unite over problems but divide over solutions”.  The weight of expectation lies heavily on Joe Hockey’s first Federal Budget to solve many many long standing fiscal problems without creating a war in the voter base over the solutions.  The budget sell is an appeal to a vision of a national ideal that Australians are “lifters not leaners”.  It is a sales pitch with modest increases in taxation and significant cost reduction measures including significant welfare reductions.  In return, the budget deficit will reduce from a projected $49.9 billion in 2014 to $29.8 billion in 2015.

Almost all the tax increase measures had been leaked prior to the budget.  Of 235 pages of budget measures, only 14 pages are devoted to revenue measures.  The headline revenue measure is the 3 year “Temporary Budget Repair Levy” of 2% which applies to income in excess of $180,000.  This increases the personal income tax rate to 49% from 1 July 2014.  To match the personal tax increase, the FBT rate increases to 49% from 1 April 2015.  Interestingly this means that there is a 2% benefit to packaging taxable fringe benefits for people on more than $180,000 between 1 July 2014 and 31 March 2015.  Will we see a salary packaging frenzy in the short term?  The same opportunity arises from 31 March 2017 to the end of the 3 year levy on 30 June 2017.  Indexation of the fuel excise is set to recommence ½ yearly by indexation to movements in customs duty rates on other fuels.  This will hit people at the bowser.

The balance of the budget is devoted to expense measures directed at cost management and reductions and which affects various forms of welfare.  In particular, the reduction in the income limit on primary earners for Family Tax Benefit B from $150,000 to $100,000 will sting the middle class from 1 July 2015 and apply only to children under 6 with a 3 year phasing out for older children.  From 1 July 2015 the Medicare rebate for a standard consultation will reduce by $5 with a doctor entitled to collect a patient contribution which would appear to create a $2 per visit windfall to doctors who choose to collect $7. Patients on concession cards and with children under 16 return to the current rebate after 10 visits each year.

Gens X, Y and late blooming boomers (born after 1 July 1958) will be hit by the increase in the qualifying age for the aged pension to age 70 by 1 July 2035. Pension income and assets threshold increases will be paused for 3 years from 1 July 2017.  The increase in the SGC rate to 12% will be slowed rising to 9.5% from 1 July 2014, remaining static to 30 June 2018 before rising over 5 years to 2023 to 12% and excess super contributions will become refundable.

Students will be affected from 1 July 2016 by a requirement to repay HELP debt at a lower starting income level set at 90% of the threshold that would currently apply, being in the order of $50,638.  However, the rate of repayment will reduce from 4% to 2% of income above the threshold.  The “cost of finance” on unpaid HELP debt will also be increased to a rate matched to the 10 year bond yield capped at 6%. Deregulation of fees for higher education will also shake up the cost of higher education.

What about small to medium enterprises? Not much.  $10,000 per employee to employ a worker over 50 who has been on benefits for 6 months.  A modest reduction in the refundable R&D tax offset of 1.5% applies from 1 July 2014 in anticipation of the drop in the company tax rate to 28.5% from 1July 2015.

All of these measures are of course subject to approval in a post 1 July hostile Senate which would appear to require cooperation with the Palmer United Party.  Early theatrics suggest that this could, at least, be entertaining.

Individuals & families

As a result of the need to improve the budgets bottom line, this years budget has focused heavily on individuals and families.

We note in particular that the changes to the family tax benefit part B will have a significant impact on many family budgets.

Deficit levy of 2% (Temporary Budget Repair Levy)

From 1 July 2014 to 30 June 2017, a temporary three-year deficit levy of 2% will be imposed on individuals with taxable income over $180,000.

A number of other tax rates that are currently based on calculations that include the top personal tax rate will also be increased accordingly (except the Fringe Benefits Tax rate) for the relevant 3 income years.  However to prevent high-income earners from utilising fringe benefits to avoid the levy, the FBT rate will be increased from 47% to 49% from 1 April 2015 until 31 March 2017 (see also companies section on FBT).

Example.  For a taxpayer with a taxable income of $200,000 per year, this results in an additional tax impost of $400 per year or $1,200 in total over three years.

 


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Fountainguard – Prosperity Advisers joint venture to build inroads to Chinese market

Continued investment to drive future growth of the Asia Business Desk

Leading East Coast chartered accounting and financial advisory firm Prosperity Advisers Group has bolstered its Asia Business desk expertise by partnering with Fountainguard Pty Ltd to increase its advisory capabilities to the Chinese market.

The joint venture enables Prosperity Advisers to grow and consolidate its established expertise providing a full range of accounting, financial and management advisory services with a sharp focus on the Chinese market. Prosperity has 25 years’ experience and has a history of success working with the Asian market facilitating investment between Asia and Australia. As China’s economy continues its growth, the joint venture positions Prosperity to facilitate local participation in that growth.

Martin Zhao and Don Lee, Chinese ex-pats with banking and commercial backgrounds are principals of the joint venture and will bridge a cultural gap ensuring clients receive a seamless experience. Prosperity will lead a six-person team that will visit five key cities in China next month to meet with clients and key influencers and introduce the venture.

Allan McKeown, CEO Prosperity Advisers says, “Prosperity’s growth in its Asia Business desk continues apace and the joint venture with Fountainguard is an important strategic development. Through our global advisory network, Leading Edge Alliance, we have built strong relationships with Chinese clients investing in Australian assets, and helped Australians enter the Asian market. This partnership underscores our commitment to growing our Asia Business Desk and providing a blue-chip service.’’

Martin Zhao says, “The Chinese investment market is notoriously difficult to enter and Don and I were impressed with Prosperity’s success and approach. The partnership between Fountainguard and Prosperity will enable Allan and his team to really build upon their existing relationships and create multiple opportunities for clients; we are excited to be working with a progressive advisory firm to build their capabilities in China.”

“The relationship with Fountainguard is a key differentiator for Prosperity Advisers. While we regularly visit China and have personal relationships with our Leading Edge Alliance partners there, we believe we are amongst the first financial advisers to secure a strategic partnership to directly build a Mandarin-speaking on the ground presence with the Chinese market.

“Our Asian based clients have invested tens of millions of dollars into Australia and will continue to do so in the future. These investments have included property, resources and active businesses. The significant ‘Investor Visa’ market has enormous untapped potential.”

National Commission of Audit: Summary of recommendations

On 1 May 2014 the Federal Government released its National Commission of Audit (NCOA) findings on streamlining the efficiency of government. The comprehensive scope of the report leaves little to the imagination and is expected to form the central blueprint for the 2014 Federal Budget.

The 64 recommendations are summarised below. The recommendations are divided into what I would call “themes” and have been grouped accordingly. Where appropriate a summary has been provided in Italics.

Theme: Approach to government and new fiscal rules (Recommendations 1-6)

These measures are aimed at shaking up the operational management of Government and bringing some of the disciplines to Government that many Australians already apply to the management of their personal financial and business affairs. To a non-economist, some of the measures belie how inefficient some aspects of management in government have become. The reforms proposed signal big potential changes to staffing within the Federal public service.

  • Achieve a surplus of 1 per cent of GDP by 2023-24.
  • Substantially reduce net debt over the next decade.
  • Ensure taxation receipts remain below 24 per cent of GDP.
  • Provide funding to unfunded public service superannuation liabilities.
  • Let the private sector take equity positions to prevent putting taxpayer funds into projects with low return and excessive risk.

Theme: Reforming the Federation (Recommendations 7-11)

These recommendations focus on delivering efficient government at the pavement level, eliminating duplication between layers of government and giving States access to tax income and gain more autonomy in their revenue collection settings.

  • Delivery is delivered by the level of government closest to the people.
  • Minimise duplication between the Commonwealth and the States.
  • Give the States access to the personal income tax base creating a State level income tax (similar to the US) and let them choose their level of tax to encourage competition between the States.
  • Share GST on a per capita basis and make equalisation grants to deal with any inequalities.
  • Replace COAG with the Productivity Commission.

Theme: Retirement system (Recommendations 12 -15)

Recommendations 12 – 13: Age Pension indexation and eligibility

Existing retirees will gradually be affected by a gradual slow down in the rate of increase in indexation of aged pensions, but the key measures are really directed at lifting the ladder on access to government pensions to Gen X, Y and beyond. The inclusion of “valuable” family homes (set below the level of the current Sydney median house price) in means testing will instantly lock many out of the government aged pension and force people in their 40’s to think about liberating value from the family home to fund their retirement. A gradual lift is proposed in the age the people can access their own superannuation savings to 62 by 2027 and ultimately 65. This could actually mean that smart acting middle aged people who have enough will be able to access key contributions concessions for a few more years.

  • Age Pension indexation arrangements to a benchmark of 28% of Average Weekly Earnings over 15 years.
  • Increase the eligibility age for the Age Pension to around 70 by 2053. The proposed change would not affect anyone born before 1965.
  • Replace the current income and assets tests with a single comprehensive means test, which deems income from a greater range of assets from 2027-28.
  • Include in the new means test the value of the principal residence above a relatively high threshold. The threshold in 2027-28 would be equivalent to the indexed value of a residence valued today at $750,000 for coupled pensioners and the indexed value of a residence valued today at $500,000 for a single pensioner.
  • Increasing the income taper rate from 50 per cent to 75 per cent for new recipients from 2027-28 onwards.

Recommendation 14: Superannuation preservation age to 62 by 2027

  • Increasing the superannuation preservation age to five years below the Age Pension age so the preservation age reaches 62 by 2027.

Recommendation 15: Tighten means testing for the Commonwealth Seniors Health Card

Theme: Health care (Recommendations 16 to 19)

The key emphasis is to push people to more of a user pays setting.

Recommendation 16: Slowing the phasing in of the National Disability Insurance Scheme

Recommendation 17: Short to medium-term health care reforms

  • Requiring higher-income earners to take out private health insurance for basic health services in place of Medicare; and precluding them from accessing the private health insurance rebate.
  • Co-payments for all Medicare funded services, underpinned by a new safety net arrangement that would operate once a patient has exceeded 15 visits or services in a year. General patients would pay $15.00 per service up to the safety net threshold and $7.50 per service once the safety net threshold has been exceeded. Concession card holders would pay $5.00 per service up to the safety net threshold and $2.50 per service once the safety net threshold has been exceeded;

Recommendation 18: Come up with a proposal to reform the overall health care (again!)

Recommendation 19: Co-payments under the Pharmaceutical Benefits Scheme

  • For general patients with costs below the safety net, a co-payment increase of $5.00 (increase from $36.90 to $41.90), while above the safety net a rise of $5.00 (from $6.00 to $11.00);
  • In line with the increased co-payment arrangements, the general patient safety net should increase from $1,421.20 to $1,613.77; and
  • For concession card holders, no increase to the current co-payment of $6.00 while below the safety net threshold of $360.00. However, once the safety net limit has been reached, concession card holders will be required to co contribute $2.00 to the cost of their medicines;
  • Opening up the pharmacy sector to competition

Theme: Family benefits

The general message is that middle class welfare in the form of direct hand-outs is being removed. The NCOA believes Government money is better spent on expanding the types of care available through the childcare system at the expense of the Government’s current proposed levels of paid parental leave.

Recommendation 20: Family Tax Benefits

  • Changing arrangements for Family Tax Benefit Part A by introducing a new single means test, with the maximum rate of the benefit paid up to a family adjusted taxable income of $48,837 and then phasing out at 20 cents in the dollar until the payment reaches nil;
  • Abolishing Family Tax Benefit Part B;
  • Introducing a new Family Tax Benefit Part A supplement to be paid to sole parent families who have a child under the age of eight. The supplement should be the same as the current maximum rates of Family Tax Benefit Part B ($4,241 for a family with a child under five, or $3,070 for those whose youngest child is aged five to eight years);
  • Changing the per child rates to be based on the current Family Tax Benefit Part A rates for a first child and paid at 90 per cent of this for second and subsequent children; and
  • Removing the Large Family Supplement and Multiple Birth Allowance recognising that the costs of children are sufficiently covered by the basic rates.

Recommendation 21: Paid Parental Leave

  • Targeting expenditure to those most in need by lowering the Paid Parental Leave wage replacement cap to Average Weekly Earnings (currently $57,460), indexed annually to movements in this wage; and
  • Savings from the lower wage replacement cap be redirected to offset the cost of expanded child care assistance, with the intent of making the changes broadly budget neutral, including retaining the 1.5 per cent levy on company taxable income above $5 million per year.

Recommendation 22: Child care

  • Should include in-home care and other types of care that are not currently subsidised

Theme: School Education

Funding generally is stepped back from the long term “Gonski” levels, but appears positioned to honour short term funding commitments of the Government. It looks like big adjustments are planned to the public service head-count in the Federal Department of Education.

Recommendation 23: Schools funding

  • Policy and funding responsibility for government and non government schools is transferred to the States, with annual funding provided in three separate, non-transferrable pools – one each for government schools; Catholic systemic schools and independent schools.
  • Publish funding and student outcomes on a nationally consistent basis.
  • Base Commonwealth funding from 2018 onwards on 2017 levels with funding indexation based on CPI and average wage price movements.

Theme: Defence (recommendation 24)

Better control of efficiency, effectiveness, accountability and transparency of Defence spending. Big shake-ups in public service organisation and staffing levels.

Theme: Government Care

Introduction of new means testing measures to limit access to Government care and further deregulation of the aged care sector.

Recommendation 25: Aged care

  • Full value of the principal residence in the current aged care means test;
  • Allow access equity in a residence, to pay for part of aged care costs;
  • Introduce a fee for providers to access the accommodation bond guarantee or insure against default of a patient.

Recommendation 26: Carer payments

  • Only one Carer Supplement per carer;
  • Income test for the Carer Allowance, set at $150,000 per year;
  • Reviewing eligibility criteria to encourage the carer to participate in employment;
  • Aligning Carer Payment to Age Pension changes (28% of AWOTE).

Theme: Unemployment benefits (Recommendation 27)

  • Young single people aged 22 to 30 without dependants to relocate to higher employment areas or lose access to benefits after a period of 12 months on benefit
  • Increasing the income test withdrawal (taper) rate to 75 per cent for Newstart recipients and other related allowances.

The minimum wage (Recommendation 28)

  • ‘Minimum Wage Benchmark’, set at 44 per cent of Average Weekly Earnings;
  • Transition over 10 years by indexing at less than; and

Theme: The Disability Support Pension (Recommendation 29)

  • Aligning the Disability Support Pension to the revised benchmarks for the aged pension described above and increasing

Theme: Higher education (Recommendation 30)

  • Students pay more, government pays less (55:45 vs the current 41:59)
  • Deregulation of bachelor degree fees
  • Increasing the interest rate on student HELP debt and increasing repayments

Theme: Foreign aid Recommendation 31

  • Outcomes focused spending with limitation of future growth in the aid spend by requiring business case justification rather than unevaluated indexation

Theme: Industry Assistance

Recommendation 32: Industry assistance

  • Limit assistance to areas of genuine market failure and transitional assistance
  • Eliminating or reducing funding for 22 existing programmes
  • Softening anti-dumping rules so they only apply on a cost/ benefit basis
  • Agenda of labour market reform, deregulation, energy policy and provision of economic infrastructure.

Recommendation 33: Assistance to exporters

Abolish:

  • Export Market Development Grants
  • Tourism industry grants
  • Asian Business Engagement Plan,

Halve funding for Tourism Australia.

Significantly reduce Austrade and restructure Austrade and Tourism and Australia into DFAT.

Recommendation 34: Research and development

Abolish sector-specific research and development programmes;

  • reducing government support for Rural Research and Development Corporations to better reflect the mix of private and public benefits;
  • Streamlining existing grants processes;
  • Better government oversight of CSIRO.

Other recommendations

Recommendation 35: Indigenous programmes – create a PM’s Indigenous Affairs agency and rationalise and consolidate programs

Recommendation 36: External review of resourcing diplomacy and consular activities, fees for consular services

Recommendation 37: Abolish the Farm Finance Concessional Loans Scheme

Recommendation 38: Housing assistance: disband existing afforable housing programs and replace with rent assistance to States that charge market rates of rent

Recommendation 39: Vocational education and training: abolish Federal schemes and drive through the States

Recommendation 40: Mental health – remove duplication between the Commonwealth and the States

Recommendation 41: Natural disaster relief – push to the States and make disaster-specific grants

Recommendation 42: Community Investment Programme – push to the States

Recommendation 43: Visa processing – Outsource

Recommendation 44: Employment services – cust costs oer jobseeker

Recommendation 45: Efficiency of the public broadcasters – better benchmarking of performance of the ABC and SBS

Recommendation 46: Containing costs associated with Illegal Maritime Arrivals

Recommendation 47: Fair Entitlements Guarantee Scheme

  • cap maximum redundancy payment equivalent to 16 weeks’ pay
  • limit the wage base for the scheme to Average Weekly Earnings.

Recommendation 48: Scale back Medical indemnity subsidies

Recommendation 49: Grants programmes – centralise administration and decrease volume

Rationalising and streamlining government bodies

Recommendation 50: Reduce the number of government bodies by 73

Recommendation 51: Consolidation of border protection services

Recommendation 52: Consolidated crime intelligence capability

Recommendation 53: Consolidation of Health bodies

Recommendation 54: Single civilian merits review tribunal

Recommendation 55: A central register and new guidelines for establishing bodies

Recommendation 56: Reduce the number of boards, committees and councils

Improving government through markets and technology

Recommendation 57: Privatisations

Short term

  1. Australian Hearing Services.
  2. Snowy Hydro Limited.
  3. Defence Housing Australia.
  4. ASC Pty Ltd.

Medium term

  1. Australian Postal Corporation.
  2. Moorebank Intermodal Company Limited.
  3. Australian Rail Track Corporation Limited.
  4. Royal Australian Mint.
  5. COMCAR.

Long term

  1. NBN Co Limited.

Recommendation 58: Management of the Commonwealth Estate – adopt commercial property management expertise

Recommendation 59: Professionalise outsourcing, competitive tendering and procurement

Recommendation 60: Outsourcing of the Department of Human Services payments system

Recommendation 61: Data – “get commercial” on big data

Recommendation 62: e-Government – accelerate on-line service delivery

Recommendation 63: Cloud computing – adopt “cloud first” strategy

Recommendation 64: Corporate services and systems – moved to shared services for all departments and agencies.

 

National Commission of Audit: Clearing the way for another golden age?

Click here to view the full National Commission of Audit Recommendations

The sun has risen on first day after the release of the National Commission of Audit (NCOA) report on the efficiency of the Commonwealth Government. Despite the frenzy of cries of disadvantage reacting to specific recommendations, my bet is that the sun will continue to keep rising. The only people at risk of imminent injury are people who try to lift the entire report in one movement.

I read several kilos of the Report last night while I watched the TV news reports tallying up how much I am going to lose when my share of the ‘kick in the guts’ is delivered. But the overall message of this document is actually positive. Australia is not yet a fiscal basket case and if some things are changed we will avoid the distress some other developed countries find themselves in.

Put specific recommendations aside, there is a lot of good common sense. The Report draws focus on massive inefficiency and duplication of activity across tiers of Government – poor fiscal management where taxpayer’s money on the expense line is being wasted on what a small business operator or a pensioner would call a profligate scale. This report is all about trimming this out of the expense line of the Government’s profit and loss statement.

In return, a massive dividend is on offer. If some of these measures are adopted, the budget bottom line could improve in our time by $60-70 billion per annum.  Please re-read the last sentence. That’s a lot of money – and a very big pot of gold to benefit the country to be reinvested in its future.

There are some gutsy moves.

  • Giving States the power to levy income taxes could put an interesting cat amongst the pigeons and cause mass migration to ‘tax haven’ States.
  • Pension and retirement measures feature heavily. For existing pensioners and retirees there is good news. The most significant changes are designed to take full effect by 2027-28 when the pension age is expected to rise to age 70 and the access age for private super will rise to 62 (then ultimately 65). The Report is raising the ladder to access the Government pension and gaining early access to private superannuation for Gen X and Gen Y. Pain for current and imminent retirees looks limited.
  • The most immediate health care initiative is the $15 medicare co-payment and extension of the existing obligation for high income earners to obtain private health insurance for basic services.
  • The Government’s Paid Parental Leave policy takes a hit with a proposal to limit it to average weekly earnings. However there is a proposal to reinvest the saving in expanded access to childcare to services including nanny style at home care.
  • Family Tax Benefit B would get removed completely and Family Tax Benefit A becomes more tightly means tested.
  • Exporters will be disappointed with the proposed removal of the Export Markets Development Grant and significant reforms to the administration and allocation of grants and research and development which looks to a key target of efficiency reform.

Not all of these measures will succeed.  They may not be designed to succeed in their present form.  Australia has a poor record of adopting recommendations from reports by eminent Australians. The authors who assume the burden of responsibility – whom I have no doubt are passionate enthusiasts for our country – must surely push some measures to the limit in the expectation that a less severe mid-point will ultimately be chosen in the tug-of-war of the political process.  A ‘kick in the guts’ is much more likely to be a dull ache.

Economic update : the state of the economy and the markets leading up to the Federal Budget

The budget is coming.  With just two weeks to go it looks like, the Government will deliver a budget with a strong long term outlook and an amount of short-term pain including the introduction of a debt levy. Not surprising really given the state of the domestic economy and the sheer number of baby boomers that will leave the workforce in coming years.  

Over the last three months, our economy has behaved with relative stability.

The last quarter, and in particular, the last month has seen the Australian dollar rise adding more pressure to rebalance the domestic economy. On the flip side, housing prices have continued to rise over the quarter combined with an increasing level of building approvals showing confidence is certainly in place.

Interest rates have remained unchanged throughout the quarter at 2.50% and RBA Governor, Glenn Stevens has commented that further rate cuts are unlikely in the short term. The board appear more comfortable with the global outlook and are predicting a reasonable pick-up this year. In Australia, the housing market has rallied in recent months and household spending has continued to increase, encouraged by our historically low interest rates.

In international markets, the US and Euro Regions have shown improvements in recent months. The US Federal Reserve made the announcement in March to reduce asset purchases by a further $10 billion a month to $55 billion. Following on from this announcement, US 3-year and 10-year Government Bond Yields rose by 0.07% and 0.32% respectively.

Overall International Bonds outperformed global equities in March, with the Barclays Global Aggregate (Hedged) $A Index increasing by 0.31%. Treasury stocks and corporate bonds gained by 0.35% and 0.36% respectively for the month.

Australian equities posted modest gains in March, with the ASX 300 rising 0.21% for the month. Commodity prices declined by 2.0% for the month in terms of Australian dollar terms, largely coming from the fall of iron ore, coking coal and steaming coal. On a market capitalisation basis, large company stocks performed better than smaller companies. The S&P / ASX 50 Leaders Index increased by 0.33% in March, while the S&P/ASX Small Ordinaries Index posted a loss of 1.16%.

On a sector basis, Financials (ex-Property) was the best performing and gained 2.92% in March. All the big four banks also recorded another round of strong gains in March. Materials and Healthcare were the weakest sectors declining by -2.89% and -2.07% respectively.

While residential dwelling investments continue to expand, commercial properties (office buildings and large shopping centre investments) declined over the month. The Australian Listed Property Market posted a loss of -1.58%.

In international equities, the Fed’s further decision to taper and indication that quantitative easing could end earlier (possibly within the next 6 months) has resulted in a more optimistic growth outlook. The MSCI North America (Local Currency) Index posted a small return of 0.68% in March.

The best performing region was India with 4.75% over the month due to political optimism. Japan was one of the worst performers losing -7.51% in the first quarter of 2014 due to the sudden 3% sales tax threatening to endanger their recovery.

China lost -1.74% and Europe reversed its previous months strong position and lost -0.65% in March.

Global resources performed poorly in the month with the FTSE Gold Mines Index and HSBC Global Mining Index declining by -11.14% and -5.42% respectively.

Over the coming three months we expect, if there are no sudden changes to the global environment….

1. A Federal Budget that takes some positive steps to reduce the deficit, cutting welfare payments to those not working and incentivising mothers into the workforce; and

2. A stable interest rate environment that is supportive of business and consumer confidence.