“Have-a-Go” (…and don’t sack Joe)

2015 Federal Budget Overview

The Federal Treasurer wants mums and dads, small business owners, farmers and the young to “get out there and have a go” in a budget targeted at stimulating activity at the grass roots.  It is a carrot and stick affair, incentivising people in the heartland but penalising the “dirty thirty” multinationals at the “top end of town” who the Government does not believe are playing the tax game fairly.  This budget is not a sequel to last year’s budget.  This is a completely new plot with a new script. Families, particularly on lower incomes, were already winners with pre-budget expansions of childcare concessions examined below.

But the heartland should celebrate the fact that – finally! – we have a budget that provides targeted measures and incentives for micro and small businesses.  Small businesses with a turnover of less than $2 million benefit from a range of measures.  The company tax rate will drop to 28.5% (but the franking rate will remain at 30%!)  There is also the “hire a hubbie” 5% tax discount for unincorporated small businesses that get a tax discount of up to $1,000.  But the signature measure must be the immediate deduction for fixed asset purchases of less than $20,000.

The Treasurer wants to trigger a 2015 year end small business spend-a-thon as SME’s lower their tax this year by upgrading their businesses before year end.  This is the only measure to commence from budget night.  You can commence the spending frenzy from now (subject to Senate approval).

Also on offer is tax free rollover relief for a change of business structure – removing obstacles for selecting the most appropriate operating structure for business.  Next FBT year go crazy with FBT free gadgets.  You can have as many tax free iPhones as you like in a year (– look after mum, dad and the kids). Whereas your mates at the top end of town can only have 1 gadget with a distinct function per year (their kids will have to put up with hand-me-downs!).

Start ups will be able to write off professional fees related to commencing business as an outright tax deduction in the year incurred.  This reverses a manifest injustice which required such costs to be written off over 5 years when the cash outflow occurred in year 1.

Health and PBI organisations will need to rethink salary packages with a new FBT exempt meal entertainment expenditure cap of $5,000 to apply from 1 April 2016 (doctors, you have just under 1 year to hammer that credit card hard).

From 1 July, start up businesses will enjoy the improvement of tax rules for employee share schemes – extending access to the CGT discount where share options are converted to shares and the total ownership period is 12 months.  Previously, the acquisition date was argued by the ATO to “reset” when the options converted to shares creating perverse outcomes.  Farmers get a 3 year write-off for drought proofing measures for fodder and grain storage.

The 30-odd multinationals that have displeased the Government by not paying enough tax get a punch kick approach with a significant tightening of tax avoidance rules while at the same time raising the standard of documentation that must be maintained to substantiate transfer prices that shift profits out of the country.  The most practical effect of this targeted approach on the rest of us is the so called “netflix” tax that will impose GST on supplies of digital content by 1 July 2017.  Fly-in/ Fly-out workers are also penalised with the zone tax rebate being removed where the worker does not genuinely live in a remote area but flies to the remote area for work and then returns to their inner city apartment at Barangaroo.

Alas, the next generation of working holiday seekers will not be able to claim the tax free threshold from 1 July 2016 by extending their visa to spend more than 1/2 the year in Australia, thereby “tipping” themselves into local “tax residency”.  The Government is going to hunt down and recover HELP debt repayments for debtors residing overseas. KaPOW – take that foreign baddies.

Perhaps this is the best budget one could hope for from a Government so hopelessly blocked by a hostile Senate.  Let us hope common sense prevails and that petty politics does not block a much needed boost to a small business community that has long been ignored by successive Governments.

 

Individuals and Family

The key focus of the Government in relation to individuals and families is two-fold. The first is about saving money where possible, and secondly getting greater numbers of people to participate in the workforce. This involves proposed changes to the child care rules.

 

Child Care Changes and Family Tax Benefit

In a pre-budget announcement the Government has highlighted that it proposes to replace the child care rebate and child care benefit, with a new single means tested child care subsidy. The subsidy would commence on 1 July 2017 and is proposed to work as follows:

  • Families earning up to $65,000 will receive 85 per cent of the childcare cost per child, or a designated benchmark price, whichever is lower. That will reduce to 50 per cent for families with incomes of $165,000 and above.
  • Hourly benchmark prices will be $11.55 (long day care), $10.70 (family day care), $10.10 (out-of-school hours care) and $7.00 (in-home care nanny pilot program due to begin in January 2016).
  • There will be no cap on subsidies for families with an income below $180,000, while those who earn beyond that will receive an increased cap of $10,000 per child, up from $7,500.
  • If the family income is more than $65,000 and both parents are not working, then the child care subsidy will not be available. This will prevent stay at home mothers from accessing the subsidy.

The above changes are very generous for families on lower incomes, and are therefore expected to cost $3.2 billion over 5 years. These changes have therefore been linked by the Government to previously proposed changes to the family tax benefit. These changes will be necessary to pay for this increased cost. These previously proposed changes have been noted below.

 

Family tax benefits (“FTB”) Part B changes

As previously flagged by the Government, from 1 July 2015, the FTB Part B primary earner income limit will be reduced from the current $150,000 p.a. to $100,000 p.a.

Additionally, the income threshold for the Dependent (Invalid and Carer) Tax Offset (“DICTO”) will also be reduced to $100,000. The reduced limits will apply from 1 July 2015.

From 1 July 2015, the FTB Part B payments will be limited to families whose youngest child is younger than six years of age to encourage workforce participation amongst parents. A transitional arrangement will be in place to ensure that families with a youngest child aged six and over on 30 June 2015 will remain eligible for the payments for two years.

In the 2014-15 year the maximum benefit payable under the FTB Part B was $4,274.15.

 

Family tax benefits Part A changes

From 1 July 2015, the FTB Part A per child add-on to the higher income free threshold for each additional child will be removed.

 

GST – ‘NETFLIX TAX’

After many previous attempts, the Government has introduced GST to digital downloads, commonly referred to as the ‘Netflix tax’, which is to apply from 1 July 2017.

Currently, digital products and services imported by customers are not subject to GST. The proposed application of GST however does not have a threshold and GST should apply straight away on all Australian purchases of digital goods from overseas suppliers.

 

Other Changes

Other changes proposed that impact families are as follows:

  • If an employer offers a paid parental leave scheme to employees then those employees will not be able to access the taxpayer funded paid parental leave scheme as well.
  • Pension eligibility rules are to be tightened.
  • The Zone Tax Offset (“ZTO”) is concessional tax offset available to people who reside and work in a specified remote area. Changes will be made to exclude fly-in-fly-out and drive-in-drive-out workers from the concession.
  • Residency rules will be changed to treat most people who are temporarily in Australia for a working holiday as non-residents for tax purposes irrespective of how long they are in Australia.
  • The Medicare low income thresholds will be increased to $20,896 for singles and $35,261 for couples with no kids.
  • From 1 July 2015, removal of the 12% of cost method and the one third of the actual expenses method for motor vehicle deductions.
  • From 1 July 2015, replace the different cents per KM rates with a single rate of 66 cents per KM.
  • The Government has proposed that from the 2016-17 income year, Higher Education Loan Programme (“HELP”) debtors residing overseas for six months or more will be required to make repayments on their HELP debt if their worldwide income exceeds the minimum repayment threshold at the same repayment rates as debtors in Australia.

 

Superannuation

One of the pleasing changes in the budget is that no changes have been made to the superannuation rules. There will however be a root and branch review of superannuation as part of the overall review of the Australian tax system.

 

Small Business

As expected, the Government has released a number of measures which have been tailored towards Small Businesses with a view to innovate, grow, and create jobs.

 

Small business tax cuts

The Government has delivered on its promised 1.5% tax cut for incorporated small businesses reducing the company tax rate from 30% to 28.5% for those with an aggregate annual turnover of less than $2 million. For those above $2 million, the current 30% company tax rate will continue to apply on all their taxable income.

Despite the shift in the company tax rate for some, the current maximum franking credit rate will remain unchanged at 30% for all companies.

To extend the tax cut to unincorporated small businesses such as those operating through partnerships or trusts, the Government has delivered a 5% discount (to be delivered as a tax offset) on income tax payable for those with an aggregate annual turnover of less than $2 million up to a cap of $1,000 per individual for each income year.

These tax cuts will be available from the 2015-16 income year.

 

Increased deductibility 

The Government has made two key changes which are intended to increase business expense deductibility and provide cash flow improvements for businesses.

From the 2015-16 income year, the Government will allow businesses to immediately deduct a range of professional expenses incurred in relation to starting a new business rather than write them off over five years. Expenses include those in relation to professional, legal, and accounting advice.

Furthermore, businesses with an aggregate annual turnover of less than $2 million will broadly be able to immediately deduct assets that cost less than $20,000 and are acquired between 12 May 2015 and 30 June 2017. These rules will revert back from 1 July 2017.

Assets costing more than $20,000 can be placed into small business simplified depreciation pool and depreciated at 15% in the first year and 30% in each following year until the balance is less than $20,000 at which time it can also be immediately deducted

The ‘lock-out’ laws which prevent small businesses from re-entering the simplified depreciation regime will also be suspended until 30 June 2017.

Additionally, small businesses will be able to access accelerated depreciation for the majority of capital asset types with only a small number of assets not eligible.

 

Employee Share Schemes

Following the Employee Share Scheme (“ESS”) Bill introduced to Parliament in March 2015, the Government has announced additional changes to the ESS rules following further consultation.

Minor technical changes that could be made to the Bill include:

  • Excluding eligible venture capital investments from the aggregated turnover test and grouping rules (for the start-up concession);
  • Providing the capital gains tax discount to ESS interests that are subject to the start-up concession where options are converted into shares and the resulting shares are sold within 12 months of exercise; and
  • Allowing the Commissioner to exercise discretion in relation to the minimum three-year holding period where there are circumstances outside the employee’s control that make it impossible for them to meet this criterion.

These changes, along with those announced in March 2015, will make the ESS regime more accessible for all Australian businesses and their employees with an expected effective date from 1 July 2015.

 

Restructure Opportunities

The Government has recognised that new small businesses may choose an initial legal structure that may not suit them at a later more established stage.

Where a small business has an aggregate annual turnover of less than $2 million, the Government will allow a change of legal structure without exposure to a capital gains tax (“CGT”) liability.

This opportunity will be available to small businesses that change their entity type from the 2016-17 income year.

 

FBT Concessions

For FBT exemption will be available to small businesses with an aggregate annual turnover of less than $2 million from 1 April 2016 that provide employees with more than one qualifying work-related portable electronic device (even where the items have substantially similar functions).

Under current rules, the FBT exemption can only apply to more than one portable electronic device used primarily for work purposes where the devices perform substantially different functions.

This measure will remove confusion with respect to whether functions overlap between different devices.

 

Corporates and Business

Unless you’re one of thirty global companies that the Government is seeking to target in a bid to protect its tax revenue, this is a “no news” budget.

 

Fringe Benefits Tax

For hospitals, charities and PBIs an annual grossed up limit of $5,000 for salary sacrificed meal entertainment and entertainment facility leasing expenses for employees (meal entertainment benefits) has been introduced where previously unlimited. This effectively makes all use of meal entertainment benefits reportable.

As such, meal entertainment benefits will constitute as a separate cap however amounts which exceed the grossed-up cap of $5,000 can also be considered when determining whether the employee has exceeded their FBT exemption or rebate cap.

These measures will apply prospectively from 1 April 2016 to coincide with the start of the FBT year. 

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R & D Tax Incentive

The Government has introduced a cap of $100 million on the amount of eligible R & D expenditure for which companies can claim a tax offset at a concessional rate under the R & D tax incentive.

The rate of the R&D tax offset will be reduced to the company tax rate for the part of a company’s eligible R & D expenditure that exceeds $100 million for an income year.

This means that R&D expenditure above $100 million will provide no greater benefit to an entity than it would receive from a normal deduction. R&D expenditure below $100 million will not be affected by a rate reduction.

Furthermore, the Government has interestingly continued to endorse a reduced refundable (43.5%) and non-refundable (38.5%) offset rate, despite the proposal being rejected by the Senate in March 2015.

 

GST

The Government has provided additional funding to the ATO to extend the ATO GST Compliance Program.

In addition to the above the Government has also announced that it will not be proceeding with previously proposed changes regarding the replacement of the GST-free treatment of going concerns and farmland with a reverse charge mechanism.

 

Primary Production Deductions

From 1 July 2016 changes will be implemented to allow primary producers an immediate deduction for capital expenditure related to fencing and water facilities.

Accelerated depreciation will also be available in relation to fodder storage.

 

Large International Corporates and Business

To deal with the perceived avoidance of Australian tax by 30 large international groups the Government has proposed to strengthen the anti-avoidance provisions. This will include strengthening the Part IVA general anti-avoidance provisions and also strengthening the penalty provisions. The changes to the penalty provisions will enable a maximum penalty of 100% of the tax plus interest to be imposed.

 

Part IVA Changes

As noted above the Government has proposed changes be made to Part IVA to prevent large international groups avoiding tax in Australia.

In conjunction with the announced changes the Government released an exposure draft Bill.

The Draft Tax Laws Amendment (Tax Integrity Multinational Anti-avoidance Law) Bill 2015 aims to target the reduction of the Australian tax base by multinational entities using artificial or contrived arrangements to avoid the attribution of business profits to a taxable permanent establishment in Australia.

According to the proposed measure, the anti-avoidance rules will apply if in connection with a scheme:

  • A non-resident entity derives income from the making of a supply of goods or services to Australian customers, with an entity in Australia supporting that supply, and
  • The non-resident avoids the attribution of the income from the supply to a permanent establishment in Australia.

For this anti-avoidance law to apply, it must be reasonable to conclude that the division of activities between the non-resident entity, the Australian entity, and any other related parties has been designed to ensure that the relevant taxpayer is not deriving income from making supplies that would be attributable to an Australian permanent establishment. It will also be necessary that the principal purpose, or one of the principal purposes, was the tax benefit.

These measures will apply from 1 January 2016, and only apply to non-resident entities that have annual global revenue of over AU$1 billion.

 

Increased Penalties

Following on from the above the Government will also increase the penalties that can be applied to companies with global revenue of greater than $1 billion. These changes will double the penalties that can be applied to these groups from 1 July 2015.

 

Transfer Pricing Changes

For large corporates with a turnover of greater than $1 billion, the OECD’s new transfer pricing documentation standards will come into play from 1 January 2016.

Under the new documentation standards, the ATO will receive the information on large companies that operate in Australia. These reports will provide the ATO with a global picture of how multinational entities operate, assisting it to identify multinational tax avoidance.

 

 

Economic Update: Zigzagging markets looking for some summer confidence

World markets took a hit last quarter with a myriad of negative or concerning news, ranging from Scotland’s independence referendum, Hong Kong’s pro-democracy protests and the US and several other nations’ air forces entering in to Syria to fight against ISIS. These events lead to a shift in sentiment towards uncertainty that saw share market and consumer confidence fall initially before rocketing back to record highs in some markets in recent weeks.

The big stories are however, the deflation of the Yen that is underway to stimulate the Japanese economy and the on-off speculation that the US Fed may start raising interest rates sometime next year as it moves toward the end of quantitative easing. Risk assets were served up at severe discounts in the months of September and October, but have regained ground of late.

Domestically, interest rates have remained on hold this month, steady at 2.50% for the 13th consecutive monthly period. Whilst the RBA has warned previously that it may look to employ a strategy to rein in bank lending to keep house prices under control, this month, Governor Glenn Stevens barely acknowledged that concern, saying “Credit growth is moderate overall, but with a further pick-up in recent months in lending to investors in housing assets. Dwelling prices have continued to rise over recent months”.

Australian equity markets fell in September then bounced back in October, with the S&P/ASX 300 Index rising by 7.2%. September saw the ASX experience its worst month since May 2012, with around $90 billion sold off in the period, and Australian shares losing almost all the gains since the start of the year in a single month.

The pressure on commodity prices has been relentless, with Iron Ore prices continuing to fall and disappointing Chinese data weighing on sentiment.  We have seen a decline in the Australian Manufacturing PMI Index by 0.8 points to 46.5. Australian exports also deteriorated in September, however the fall of the Australian Dollar should see this sector improve in the months to come. Australian Manufacturing PMI measured exports sub-index declined by 11.0 points to 42.2 points, bringing Australia’s international competitiveness down by 4.17%.

Looking to international markets, concerns are rearing their head that Europe remains at risk of moving into a recession. ECB chief Mario Draghi weighed in on concerns saying “without reform [in the eurozone], there can be no recovery”… “I cannot see any way out of the crisis unless we create more confidence in the future potential of our economies”. In China the MSCI Local Currency Index underperformed, posting a loss of -6.20% in September before recovering confidence to achieve a 17.7% increase in retail sales and a 13.8% upturn in industrial production in October. The Hong Kong pro-democracy protests impacted on investor sentiment, resulting in the Hang Seng Index dropping by -7.31% over the month of September. Manufacturing activity in Mainland China has slowed as retail sales continue to decrease.

Gold and Oil pricing continued to fall in October. The downturn in Gold coming on the back of an appreciating US Dollar and rising expectations of the US tightening monetary policy.

Over the coming months we will be carefully watching the following:

  • The rising prices of property markets in Melbourne and Sydney and the concern of investors entering the markets chasing short term gains.
  • Geopolitical unrest and the threat of global terrorism destabilising the international economy, causing a decline in consumer confidence.
  • An increase in Australian employment market impacting local consumer confidence, impacting on small businesses.
  • Outcomes from the G20 meeting in Brisbane.

 

Government freezes super guarantee

The government has announced that it will freeze the superannuation guarantee at 9.5% until 2021.  Under previous plans, the super contributions paid by employers had been set to increase in 0.5% increments from the current rate of 9.5% until they reached 12% in 2019/2020. It will now be 2025 by the time the guarantee reaches 12%. The rationale behind the freeze on super is that it will ease pressure on the federal budget, due to the significant tax concessions associated with superannuation contributions.

There have been many claims by superannuation industry representatives about how this will impact the size of future superannuation accounts. While these figures can only amount to speculation because nobody can accurately predict wages, fund growth rates and the future taxation of superannuation, it is certain that these changes will result in smaller superannuation accounts. It is also likely that the freeze will disproportionately affect younger Australians, women, low-income earners and part time/casual employees.

There are, however, some strategies that may be useful to individuals seeking to counterbalance the impact of the freeze:

  • Salary sacrificing into your super is a great way to offset the impact of the superannuation guarantee freeze. The money that you salary sacrifice into super, known as concessional contributions, will be taxed at 15%, which for most people is significantly lower than their marginal tax rate. Therefore, salary sacrificing is a particularly effective tax strategy for high-income earners. Concessional contributions are capped at $30 000 per year for most people and $35 000 per year for over 50s. For low-income earners, the government co-contribution is a great way to boost super balances. If you earn under $34 448, the government will contribute 50c for every $1 you put into your super account from your after-tax income (up to a total co-contribution amount of $500). If you earn anywhere up to $49 448, you may also be eligible for reduced co-contribution payments.
  • If you are a low-income earner or are taking a break from work, it may be worth investigating the possibility of your partner making super contributions on your behalf. If you earn less than $13 800, then your partner will be eligible for a low-income spouse tax offset with a maximum value of $540.
  • It may also be beneficial to re-examine your superannuation investment strategy, considering the returns and risks involved with different investment options. Your investment strategy choices should be informed by your age, retirement goals and level of comfort with risk.

Regardless of whether or not the super guarantee freeze has affected your superannuation plans, now is a good time to start putting some serious thought into your superannuation, and the retirement that you want.

Economic update: Housing and property leading the economy again

In the wake of the Federal Budget consumer confidence has dipped in the quarter to June and our resilient Australian dollar is continuing to make our domestic outlook more difficult than it needs to be. This combined with the tragedy this week in Eastern Europe and escalating challenges in the Middle East makes geopolitical risk to the world higher than it has been of late.

The domestic cash rate remains unchanged at 2.50% and there is no sign of a rise to come in the near term. The Reserve Bank came out in early July and warned that Australians shouldn’t always expect house prices to rise and minutes in mid July indicated they will be holding rates steady until there are significant signs of improvement outside of the mining sector. On the positive, our economy has had moderate growth and there are continued signs that the transition away from mining is slowly occurring with growth in our tourism, oil and gas and property sectors.

Housing construction and new home sales have expanded significantly over the past year, although in the second quarter the pace of increase has moderated a little.

In international markets the US economy has continued to show very positive signs. The US Business output boomed over the month of June – manufacturing output and new orders rose at the fastest pace since April 2010 and job creation hit a four-month high.

A ‘mini-stimulus’ package from the Chinese Government has helped improve economic activity in the region. The Chinese economy has grown at an annual rate of 7.5% in the second quarter, up slightly from 7.4% in the first three months of the year.

The European share market was the only region posting losses in June, with slowed industrial growth.

The Australian bond market continued to perform steadily over the quarter with the UBS Australia Composite All Maturities Index increasing by 3.08%. Within the asset class Government bonds were the stronger performer gaining 3.55%, while corporate bonds increased by 2.57%.

While bonds performed well, Australian equities lost ground in the month of June, recording a loss of -1.45% as measured by the S&P/ASX 300. Over the entire quarter equities only recorded only a slight gain of 0.88%. [Read more…]

Tax tips to consider before 30 June 2014

There is less than a month until the end of the financial year and following on from a very tough Federal Budget this is shaping up to be a very important year-end for tax planning.  This is largely thanks to the increase in tax rates we are likely to see next year from the proposed deficit levy. 

So in preparation for the changes coming, there are some important steps you can take, before the end of the financial year that will assist in reducing your tax payable when your 2014 returns are lodged and in the year beyond to 2015.

Here are a few, and you can see more in our downloadable tax preparation guide ‘113 Tax Tips‘.

 

Avoiding the Deficit Levy

The deficit levy, which is due to commence on 1 July 2014 is likely to impact individuals with a taxable income above $180,000 and is expected to last for 3 years (i.e. the 2014-15, 2015-16, and 2016-17 financial years).  Managing your tax affairs to minimize exposure to the levy is one of our most important tasks this year.

When combined with the 0.5% increase in the Medicare Levy from 1 July 2014, this represents a jump in the top marginal tax rate from 46.5% to 49%.

If you are already on the top marginal tax rate, then increasing your income this year with an offsetting reduction in next year’s income could save you 2.5% in tax on that amount. Strategies could include the following:

  • Choosing not to prepay expenses such as interest.
  • Bringing forward into 2013-14 any expected income from asset disposals via early sale.
  • Deciding not to delay income receipts (if this is a strategy you typically use).

You may also choose to make greater use of salary packaging in the next 10 months to reap the benefits. 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.

Changes to the rules around the purchase of depreciating business assets

In 2013 the Government foreshadowed changes to the ability of eligible small businesses to claim an  immediate deduction for expenditure on depreciating assets costing less than $6,500 (and the ability to claim $5,000 for motor vehicle purchases).

Whilst these changes have yet to be enacted they are intended to be retrospectively implemented from 1 January 2014, when the threshold will be reduced to $1,000.  So being aware of this is important in your tax planning process.

Superannuation contributions for the year ending 30 June 2014

Prior to year end it is also important not to forget about superannuation. You may consider any of the following strategies in looking over your superannuation:

  • Where appropriate, ensure that maximum concessional contributions are paid before 30 June. It is also critical that care is taken to not exceed the maximum contribution limits.
  • You may wish to give consideration to making non-concessional contributions to superannuation.
  • If you have a spouse, parent or child on a low income then consideration should also be given to making a non-concessional contribution for them and taking advantage of the government co-contribution.
  • If your superannuation fund is in pension phase then it is important to remember to make the minimum pension payments from your SMSF before 30 June 2014. This is discussed further below.

Understand your minimum Pension Payment requirements

It is worth noting that the pension drawdown relief provided by Government as a result of the downturn in the global financial markets ceased from the 2013-14 year. Minimum pension payment percentages have now reverted back to those last seen in the 2007-08 year.

While the table below provides further details, we recommend that you discuss your personal circumstances with your adviser before making the payment to ensure the correct amount is paid and to also ensure an appropriate buffer given changes.

Age                              Minimum

Under 65                               4%
65 to 74                                 5%
75 to 79                                 6%
80 to 84                                 7%
85 to 89                                 9%
90 to 94                                 11%
95 to whenever                    14%

 

Put in place appropriate trust distributions

As in previous years, if you operate a trust it is crucial that the trust resolves how it will distribute the income of the trust prior to 30 June 2014.

Other items

While there is various other year-end tax planning items that can be considered, it is not possible to provide a comprehensive list in an article such as this. Please discuss any items you wish to consider with your adviser or download our 113 Tax Tips for more insights that you can review in your own time.

Please note that our comments above are general in nature, and should not be relied upon without seeking further advice from your adviser.

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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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.