What the 2018 Federal Budget means for you

Written by Shereen Churchill (Financial Adviser)

On 8 May 2018, the Turnbull Government delivered the 2018/19 Federal Budget which focused on reining in spending, cutting taxes for middle Australia and small to medium sized enterprises, and supporting older Australians. It would be reasonable to say that this Budget starts to lay a foundation for the next Federal election.

From a pure financial planning and wealth perspective, the positive news is that the changes are minimal and largely positive. This is a very welcome outcome given the significant changes, particularly to superannuation, that were announced in the 2016 Budget and largely came into effect from 1 July 2017 (refer to our end of financial year planning blogs for further info).

As is always the case, these measures will need to pass through the legislative process before they become law, and may change during that process.

To help you understand the key announcements made by the Treasurer, ITL Financial Planning have put together a written summary of the key areas specific to self-funded retirees, professional families and successful business owners. BT’s Bryan Ashenden provides an overview for all Australians as well SMSFs members via video.

Self-Funded Retirees

For our self-funded retirees with SMSFs, the biggest proposals were in relation to a reduction in audit requirements (and therefore possible fee savings) and an increase in the number of members of a SMSF. For all self-funded retirees, the other major announcements were in relation to increased aged care choice, encouraging older Australians to invest in lifetime income streams and reductions in income tax.

For SMSFs, the maximum number of members will increase from 4 to 6 people from 1 July 2019. This will allow for greater flexibility for larger families. However, it’s important to consider the alignment of financial and investment goals of each of the potential members.

In addition, the audit requirements for SMSFs will move from annually to three year periods for funds with a history of good record keeping and compliance. This may lead to a reduction in ongoing administration costs of SMSFs.

For older Australians who would like the choice to remain in their homes and avoid residential aged care facilities, there will be a total of 74,000 high level home care places funded by 2021-22.

New social security means testing will apply to pooled lifetime income streams which commence on or after 1 July 2019. The measure will encourage pensioners to invest in pooled lifetime income streams which will allow them to receive regular income for their lifetime.

Proposed personal income tax plan changes are outlined under the “professional families” heading.

Professional Families

For our professional families with SMSFs, the biggest proposals were in relation to a reduction in audit requirements (and therefore possible fee savings) and an increase in the number of members of a SMSF. These proposals are outlined under the “self-funded retirees” heading. For all professional families, the other major announcements were in relation to reductions in income tax and a focus on protecting superannuation balances for the benefit of retirement.

The Government revealed a seven-year personal income tax plan for “lower, fairer and simpler taxes” with relief for low and middle income earners, starting 1 July 2018. The measures will also tackle bracket creep.

From 1 July 2018, the Government will provide a tax offset of up to $530 for tax payers in the 2018-19, through 2021-22 financial years. Those earning up to $37,000 who currently face a 19 per cent tax rate will have their tax bill reduced by up to $200. These savings will increase incrementally between $37,000 and $48,000 to a maximum saving of $530 for those earning between $48,000 and $90,000. The benefit will then gradually reduce to zero at an income of just over $125,000.

Bracket creep measures will see the upper threshold of the 32.5% tax bracket increase from $87,000 to $90,000 from 1 July 2018 and to $120,000 from 1 July 2022.

The Low Income Tax offset will also increase from $445 to $645 from 1 July 2022.

This will be followed by a flatter personal tax system by 2024-25 where the 37 per cent tax bracket will be abolished completely. Australians earning more than $41,000 will then pay only 32.5 cents in the dollar all the way to the top marginal tax rate threshold that will be adjusted to $200,000. The top marginal tax rate of 45 per cent will apply to incomes above $200,000.

The Medicare levy will not be increased by 0.5% to 2.5% from 1 July 2019 as proposed in the 2017 budget as the Government believe that the NDIS Scheme is fully funded for the future.

Fees on super accounts with balances of less than $6,000 will be capped at 3 per cent and superannuation fund exit fees will be abolished for those wanting to switch funds from 1 July 2019.

From 1 July 2019, superannuation fund members aged under 25 and those whose super accounts has not received a contribution in 13 months (defined as inactive members), will be required to opt-in to default insurance inside super. This measure attempts to ensure younger Australians’ savings are not eroded by insurance premiums they don’t need or don’t know they have. However, the changes, while aimed at the protection of super balances, will not be without casualty and will undoubtedly deepen the problem of underinsurance for many Australians.

For younger members, TPD and Income Protection (or Salary Continuance) can be a critical component of their overall financial plan. With respect to the cessation of cover for inactive accounts, the largest impact will be felt by women, who tend to enter and exit the workforce more frequently than men – often due to taking maternity leave. In addition, there are cases where clients will have more than one superannuation fund, due to the retention of insurance in one fund, and the choice of investment in another (being the fund into which they contribute). The above measures will have a negative impact on both of these types of clients, and they may find themselves without cover. We will be working with those clients who have cover within their employer super fund, and where appropriate, take positive steps to retain this protection.

Successful Business Owners

For our successful business owners with SMSFs, the biggest proposals were in relation to a reduction in audit requirements (and therefore possible fee savings) and an increase in the number of members of a SMSF. These proposals are outlined under the “self-funded retirees” heading. For all other successful business owners, the major announcements were in relation to the extension of the instant asset write off and tax cuts, with the objective of ensuring they remain competitive globally. Furthermore, reductions in personal income tax and a focus on protecting superannuation balances for the benefit of retirement. These last two proposals are outlined under the “professional families” heading.

The Government extended the $20,000 instant asset write off for a further 12 months to 30 June 2019 for businesses with a turnover of up to $10 million.

Tax cuts for small business began in 2016-17 when companies with a turnover of less than $10 million had their tax rate cut to 27.5%. This rate was extended to companies with annual turnover less than $25 million in this financial year and from 1 July 2018 will be expanded to include companies with annual turnover less than $50 million.

Proposed personal income tax plan changes are outlined under the “professional families” heading.

All Clients

Extra funding into Medicare and the PBS will see new medications being funded including those to treat spinal muscular atrophy, breast cancer, refractory multiple myeloma and relapsing-remitting multiple sclerosis and an HIV preventive drug.

Concluding thoughts

Overall, the number of changes announced in this year’s Federal Budget are small compared to prior years. For many, this is important as it allows a continued focus on the significant changes to superannuation which took effect from 1 July 2017.

 

This information has been prepared and issued by ITL Financial Planning and is current as at 9 May 2018. Material contained in this publication is an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such. This Information may contain material provided directly by third parties and is given in good faith and has been derived from sources believed to be accurate at its issue date. It should not be considered a comprehensive statement on any matter nor relied upon as such. ITL Financial Planning does not accept responsibility for the accuracy or completeness of, or endorses any such material. Except where contrary to law, we intend by this notice to exclude liability for this material. This information does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness having regard to these factors before acting on it. The tax position described is a general statement and is for guidance only. It has not been prepared by a registered tax agent. It does not constitute tax advice and is based on current tax laws and our interpretation. Your individual situation may differ and you should seek independent professional tax advice. It is important to note that the policies outlined in this publication are yet to be passed as legislation and therefore may be subject to change or further refinement.