Budget 2018 – Personal Tax & Superannuation

As widely reported in recent weeks, broad-ranging measures are proposed to reduce the effective tax rates for the majority of Australians through immediate, direct tax rate cuts and a revamp of the marginal tax system slated over the next decade.

Personal tax

Boosted by stronger-than-expected economic growth and a surge in revenue, relief will be provided to taxpayers under a seven-year, three-step personal income tax plan:

1. A new tax offset scheme

In addition to the existing Low Income Tax Offset, a new non-refundable (temporary) tax offset applying from 1 July this year will provide targeted relief to low and middle-income earners through to 30 June 2022, to the exclusion of higher income earners.

  • Those earning up to $37,000 are set to save up to $200 per annum through this measure;
  • Those earning between $48,000 and $90,000 – representing 4.4 million of voters – achieve a maximum saving of up to $530 per annum; and
  • Above income of $90,000, this tax relief begins to phase out, with no relief provided above income of $125,000.

The result of this offset will be an increase in the effective tax-free threshold to $21,595.

Importantly, this saving does not flow through to the weekly/fortnightly/monthly pay packet, but rather upon lodgement of the annual income tax return. So instead of a regular increase in weekly household income, this in effect provides a once-a-year cash boost to half of all Australians, not dissimilar to the Rudd Government’s cash handouts (albeit delivered year after year).

2. Fixing bracket creep

Nominal wages growth, even if only modest in recent years, has delivered a boon to Government coffers in the form of bracket creep and part of this windfall is being returned to particularly middle-income taxpayers via the expansion of the 32.5% marginal tax bracket to $90,000. This has a direct and immediate increase on take-home pay. This is proposed to commence from 1 July this year, with plans to increase the upper threshold to $120,000 by FY2023, expected to impact 1.8 million taxpayers.

3. Simplifying marginal tax rates

From 1 July 2024, the 37% marginal bracket, currently applying to those earning above $87,000, will be abolished completely meaning Australians earning above $41,000 would pay tax at the rate of 32.5% through to the top marginal tax rate which would kick in at the higher threshold of $200,000. The result is a flatter marginal tax structure:

 
INCOME TAX RATE
Less than $18,200 0%
$18,201 – $41,000 19%
$41,001 – $200,000 32.5%
Above $200,000 45%
 

In contrast to the temporary tax offset, it is this part of the plan which delivers tax relief to higher income earners…although they will have to wait at least five years to bank the savings.

Putting it all together, the three-step plan is expected to benefit taxpayers progressively over the next seven years:

INCOME TAX SAVINGS (per annum)
From 1 July 2018 From 1 July 2022 From 1 July 2024
$50,000 $530 $540 $540
$75,000 $530 $540 $540
$100,000 $515 $1,125 $1,125
$125,000 $140 $2,025 $2,250
$150,000 $135 $2,025 $3,375
$175,000 $135 $2,025 $4,500
$200,000 $135 $2,025 $7,225

The revenue impact of these savings is projected to be $13.4 billion over the next four years, totalling $140 billion over the decade.

Other personal tax measures:

  • Increase in the Medicare Levy which was proposed last year has been scrapped and will remain at 2%
  • Managed Investment Trusts (e.g. managed funds) will no longer be able to claim the 50% CGT discount at the trust level – those gross gains will be passed through to investors and the discount available to eligible individual taxpayers

And in direct response to Labour’s proposal, the Treasurer reaffirmed the Coalition’s commitment to maintain the existing refundable franking credit system.

Superannuation

No surprises here…and thankfully so, as industry is still suffering the hangover effects from the major overhaul announced this time two years ago.

This year’s superannuation initiatives are mostly administrative to improve system efficiency and restore choice to members. In summary:

  • SMSFs with a clear audit history and a record of lodging returns on time in the three consecutive years prior will move to a three-year audit cycle, rather than be subject to an annual audit
  • A small concession will be granted to those aged 65 – 74 years with a balance of less than $300,000 in that they will not be required to satisfy the work test in order to make personal contributions to superannuation in the first year that they would otherwise not satisfy the test
  • The maximum number of members within SMSF and SAF funds will be increased to six from 1 July 2019 to allow for greater succession planning
  • Higher income earners will be able to opt-out of compulsory Super Guarantee contributions for amounts that would otherwise put them in breach of their $25,000 concessional contribution limit
  • From 1 July 2019, exit fees will be banned, making it easier for members to change or consolidate funds
  • Investment and administration fees charged by funds will also be capped at 3% for lower balance members
  • To avoid the erosion of smaller balances, superannuation funds will no longer be able to automatically apply life insurance policies to low-balance and younger member accounts, giving those members the choice to opt-in

Cameron Harrison’s partners have been delivering specialist advice to business owners and families for over 50 years. Through our defined planning methodology, our clients gain access and receive a careful and properly integrated wealth framework.

For further information on how to consider and effectively plan for these changes or any other inquiries, please contact us on +613 9655 5000.

Paul Ashworth, Managing Partner (paul.ashworth@cameronharrison.com.au)
Anne-Marie Tassoni, Partner (am.tassoni@cameronharrison.com.au)
David Clark, Director (david.clark@cameronharrison.com.au)
Tristan Bowman, Manager (tristan.bowman@cameronharrison.com.au)


This article is part of our Budget 2018 series. Please click through for more coverage.

Personal Tax & Superannuation
Small & Medium Business
Economic & Fiscal Implications