2017/18 Federal Budget

Transcription

1 2017/18 Federal Budget The 2017 Federal Budget is about making the right choices and being fair and responsible. Which, translated into Treasurerspeak, means I never want to hear anyone ever mention the 2014 Budget ever again.... This time the Government has played a pretty straight bat and stuck closely to its pre-budget announcement themes of infrastructure and housing affordability. Superannuation and financial services came in for some interesting changes some of which were expected and welcome. The Government is encouraging older people to downsize by allowing people aged 65 or older, including those over age 75, to contribute the proceeds of selling their home to super without the need to meet a work test. This will be effective from 1 July The contribution of up to $300,000 will also be exempt from the non-concessional contributions cap. The Government has also devised a new plan to use super to fund deposits for first home purchases. From 1 July 2017, first home buyers will be able to make voluntary contributions to super including salary sacrifice and deductible personal contributions of up to $15,000 a year and $30,000 in total to provide a deposit on a first home. The Government has neatly sidestepped the problem of using super to fund a first home by not touching compulsory super contributions. As clients can use pre-tax dollars, it is likely to be more successful than the largely unlamented First Home Savers Accounts that had the popularity of a bunch of lead balloons. This new plan will also get traction in the Senate, where Senator Nick Xenophon has long been a supporter of using super to pay for first homes. The Government announced the name of the new financial services external dispute resolution body the Australian Financial Complaints Authority. This new body will combine the functions of the Super Complaints Tribunal, Financial Ombudsman Service and Credit and Investments Ombudsman. This new body will commence from 1 July Some of the other changes were not so welcome especially those affecting the major banks who will now be charged a levy of 0.06 per cent a year on liabilities, starting from 1 July Foreign residents are also negatively affected as they will pay more in CGT withholding and lose the CGT main residence exemption from 9 May On the revenue side, the Government has committed to fully funding the National Disability Insurance Scheme but will increase the Medicare levy from 1 July 2019 by 0.5 per cent to pay for it. On the social security front, the Government has doubled the Liquid Assets Waiting Period. On the whole, this is the Ginger Spice of Federal Budgets it is not Posh or Sporty and Babies don t get a look in this time, but most importantly it certainly isn t Scary like Following is a summary of the key issues arising from the Budget and how they may affect the financial situation of your clients and the financial services industry. 1

2 Thank you for reading our Budget analysis. The contents can be found on the following pages: Superannuation 2 Taxation 4 Social Security 6 Superannuation First Home Super Saver Scheme From 1 July 2017, super can be used to assist with saving for a first home purchase. Up to $15,000 per year of voluntary contributions (which appears to capture both concessional and non-concessional) can be contributed to super, and then be available to withdraw for the purposes of purchasing a first home. A total amount of voluntary contributions of $30,000 can be made available under the scheme. These contributions must be made within existing concessional and non-concessional contributions caps. Contributions will also accrue deemed earnings calculated at the 90-day bank bill rate plus three percentage points (4.79 per cent per year deemed earnings based on the March rate). These earnings will be withdrawn along with the contributions when a home purchase is made. On withdrawal, concessional contributions and deemed earnings will be taxed at the individual s marginal tax rate, less a 30 per cent tax rebate. It is presumed non-concessional contributions are to be withdrawn tax-free. First Home Super Saver accounts are created on an individual basis meaning each member of a couple can have their own account. Importantly, the release of funds to purchase a home will not count as income for certain tests, such as HELP/HECS repayments, family tax benefits or child care benefits. This measure replicates the thinking behind the abandoned First Home Saver Account scheme, but uses the existing super infrastructure to implement it. This scheme may also encourage younger people to engage with their superannuation well in advance of their retirement hopefully driving more interest and attention to the ever-growing pool of default super accounts. Contributing the proceeds of downsizing to super From 1 July 2018, people over age 65 who sell their family home may have the opportunity to make a one-off contribution of up to $300,000 of the proceeds from the sale to their super. To qualify, the home which is being sold must have been their main residence for at least the previous ten years. If the home is owned jointly by a couple, each person will be able to access the $300,000 threshold. The contribution appears to be similar to small business CGT contributions in that amounts contributed under this home downsizing cap are exempt from the total super balance rules and are not impacted by previous non-concessional contributions. Further, contributions under this cap will not be subject to age-based contribution restrictions. This means the annual NCC fund cap for people aged over 65 years is disregarded, as is the work test for those aged and the prohibition on voluntary contributions for those aged over 75. Once made, the contributions will not provide any additional benefits to either the total super balance calculation or give rise to any adjustments to their transfer balance account. It is important to note there are no provisions for social security means testing exemptions on these contributions once made, the funds will be assessed as standard superannuation monies. This may prove too high a price to pay for many older Australians who would prefer to maintain their current level of social security benefits as opposed to releasing equity in their home to fund their retirement. This is a fantastic change for older Australians who are willing to downsize their home, however, for the majority of Australians who wish to age in place or are concerned about their age pension entitlements this measure is unlikely to be enough to change their mind. Changes to Limited Recourse Borrowing Arrangements The Budget also makes provision for the proposed changes to limited recourse borrowing arrangements (LRBAs) announced by Treasury through the release of exposure draft legislation on 27 April That is, from 1 July 2017, the borrowings under a LRBA are to be counted towards an individual s transfer balance cap, and also give rise to a transfer balance credit where the value of a retirement phase pension is increased by the repayment of LRBA debt. 2

3 Specifically, members in a self-managed super fund using a LRBA will have the portion of the borrowing under the LRBA included when calculating their total super balance each year. The portion of the borrowing included is based on the proportion of the member s interest in the fund at 30 June, however, members who are not receiving any benefit from the LRBA (that is, their interest is not backed by the geared asset) are not impacted by the changes. Total super balance is important for the purposes of making non-concessional contributions after 1 July 2017 and being able to access the concessional contributions carry forward from 1 July Total super balance is also used to determine whether small funds are able to use the segregated method of calculating their exempt current pension income in a financial year. Further, a transfer balance credit arises where debt under a LRBA is repaid in a disproportionate manner, and this repayment gives rise to an increase in the value of a pension interest. For example, a self-managed fund repaying a LRBA using cash which is being held for the purpose of backing an accumulation interest will reduce the value of the accumulation account and increase the value of the pension account. This increase in value will be included as a transfer balance credit for the pension member. The inclusion of a member s debt when calculating their total super balance is an interesting policy move effectively believing that a person can use the gross value of a loan to fund their retirement, but only when considering the eligibility to make contributions to super. A further ambiguity raised by the exposure draft is whether LRBAs refinanced after 1 July 2017 will remain grandfathered. Self-managed super and non-arm s length arrangements From 1 July 2018, self-managed superannuation funds undertaking related party transactions will have to ensure that expenses which would normally apply in a commercial transaction are included when considering whether a transaction has been made on a commercial basis. This appears to be an amendment to ensure that significant costs incurred with establishing certain transactions, such as related party loans or investments in related parties allowed under the SIS Act, include re-imbursements for ancillary costs. This helps ensure self-managed super funds do not gain an additional advantage in undertaking related party transactions. This measure looks to ensure potential loopholes around related party transactions and commercial terms are closed to reduce the exploitation of tax law. Extending tax relief for merging super funds Transitional measures set to expire this financial year allowing merging super funds to carry over capital and income losses and defer tax consequences on transfers of assets have been extended to 1 July The Government has signalled a potential to make this relief permanent, subject to the Productivity Commission s review into the efficiency and competitiveness of super. While this is not likely to have a direct impact on members, this change allows funds to continue to consolidate products as businesses merge or are acquired without losing potentially significant tax benefits or causing additional tax issues. This relief has not been extended to self-managed super funds. A welcome measure for larger funds who may be considering acquisitions or mergers in the near future. 3

4 Taxation Medicare Levy Rate From 1 July 2019, the Government will increase the Medicare levy by half a percentage point from 2 to 2.5 per cent of taxable income to ensure the National Disability Insurance Scheme (NDIS) is fully funded and to future guarantee the Medicare system. Similar to the last increase in the Medicare levy, this further increase will only be used to fund the NDIS. Low-income earners will continue to receive relief from the Medicare levy through the low-income thresholds for singles, families, seniors and pensioners. The current exemptions from the Medicare levy will also remain in place. Other tax rates that are linked to the top personal tax rate, such as the fringe benefits tax rate, will also be increased. Medicare Levy low income thresholds From the 2016/17 income year, the Government will increase the Medicare levy low-income thresholds for singles, families, seniors and pensioners to take account of movements in CPI so that low-income taxpayers will generally continue to be exempt from paying the Medicare levy. The threshold for singles will be increased to $21,655. The family threshold will be increased to $36,541 plus $3,356 for each dependent child or student. For single seniors and pensioners, the threshold will be increased to $34,244. The family threshold for seniors and pensioners will be increased to $47,670 plus $3,356 for each dependent child or student. A welcome event for low income earners. Temporary Budget Repair Levy ceases While not announced in the Budget, the Temporary Budget Repair Levy has not been extended and as such will cease to apply from 1 July Letting this additional levy expire was expected but having it confirmed is positive for higher income earners. Capital gains tax changes for foreign investors The Government will extend Australia s foreign resident capital gains tax (CGT) regime by: denying foreign and temporary tax residents access to the CGT main residence exemption from 7.30pm (AEST) on 9 May 2017, however, existing properties held prior to this date will be grandfathered until 30 June 2019 introducing a charge to foreign owners of property where the property is not occupied or available for rent for at least six months per year, for foreign investment applications made after 7.30pm (AEST) on 9 May 2017 increasing the CGT withholding rate for foreign tax residents from 10 per cent to 12.5 per cent, from 1 July 2017 reducing the CGT withholding threshold for foreign tax residents from $2 million to $750,000, from 1 July The significant reduction in the withholding threshold will increase the number of investors affected by this withholding amount. Given the obligation for withholding lies with the purchaser of the property, this may increase the complexity for many foreign resident clients if they purchase property. 4

5 Capital gains tax discount changes for affordable housing From 1 January 2018, the Government will increase the capital gains tax discount, from 50 per cent to 60 per cent, to resident individuals who elect to invest in qualifying affordable housing. To qualify, housing must be provided to low to moderate income tenants, with rent charged at a discount below the private rental market rate. The affordable housing must be managed through a registered community housing provider and the investment held for a minimum period of three years. The higher discount would flow through to resident individuals investing in qualifying affordable housing Managed Investment Trusts. This is a very interesting move by the Government in a Budget which is about providing affordable housing it could be argued that increasing incentives for investors to purchase residential property may be against the great Australian dream of owning a home. However, the measure may increase access to affordable rental properties for lower income earners. Disallow the deduction for residential rental property travel expenses Effective from 1 July 2017, deductions for travel expenses related to inspecting, maintaining or collecting rent for a residential rental property will be disallowed. Additionally, the rules around claiming depreciation will change so that deductions for plant and equipment will only be allowed where an expense has actually been incurred. An integrity measure to address concerns that many taxpayers have been claiming travel deductions without correctly apportioning costs, or have been claiming depreciation on assets for which they did not purchase. This measure will not prevent investors from engaging third parties such as real estate agents for property management services as these expenses will remain deductible. Small Business CGT concession From 1 July 2017 the Government will amend the small business capital gains tax (CGT) concessions to ensure that the concessions can only be accessed in relation to assets used in a small business or ownership interests in a small business. Some taxpayers are able to access the concessions for assets which are unrelated to their small business, by, for example, arranging their affairs so that their ownership interests in larger businesses do not count towards the tests for determining eligibility for the concessions. The how hasn t been explained but the why is defined! The devil will likely be in the detail for this one. HELP Debts The Government will place the higher education sector on a more sustainable footing by revising the income thresholds for repayment of HELP debt, repayment rates and the indexation of repayment thresholds, effective from 1 July A new minimum threshold of $42,000 will be established with a one per cent repayment rate and a new maximum threshold of $119,882 with a 10 per cent repayment rate. 5

6 Social Security Consistent income treatment for families receiving Family Tax Benefit Part A From 1 July 2018, the Government will implement a consistent 30 cents in the dollar income test reduction for Family Tax Benefit (FTB) Part A families with a household income in excess of the Higher Income Free Area, which is currently $94,316. This ensures that higher income families are subject to the same income test taper rates. Currently there are two income tests applicable to FTB Part A. One reduces the maximum rate of FTB part A and the other reduces the base rate of FTB part A. The income test which provides the higher rate of payment will be applied. Without sufficient details, it would appear that this measure intends to replace the two current tests with this new one, implying a more consistent reduction of the payment. Removal of planned Family Tax Benefit Part A rate increase The Government no longer intends to proceed with plans to increase the maximum payment rate for Family Tax Benefit Part A. Originally, from 1 July 2018, the maximum rate of FTB Part A was meant to be increased by $10.08 per fortnight. The Government indicated in the Federal Budget announcement that the decision not to proceed with this measure is part of their efforts to repair the Budget deficit. The Family Tax Benefit Part A maximum payment rate increase was originally designed to compensate for the effect of phasing out Family Tax Benefit Supplements. On 12 April 2017, the Government successfully passed measures that include freezing indexation of maximum and base payment rates for Family Tax Benefit Part A. It is expected that this measure, similar to other measures involving Family payments, will generate some vigorous opposition, but the Government may, with the support of minor parties, succeed. Energy Assistance Payment The Government will make a one-off Energy Assistance Payment in 2016/17 of $75 for singles and $125 per couple for those eligible for qualifying payments on 20 June 2017 and who are residents in Australia. Qualifying payments include the Age Pension, Disability Support Pension, Parenting Payment Single, the Veterans Service Pension and the Veterans Income Support Supplement, Veterans Disability Payments, War Widow(er)s Pension, and permanent impairment payments under the Military Rehabilitation and Compensation Act 2004 (including dependent partners) and the Safety, Rehabilitation and Compensation Act Income Support Bonus continuation The Government plans, for a period of over five years from 2016/17, to continue the Income Support Bonus. The Income Support Bonus provides financial support every six months to eligible children of veterans to assist with the cost of their education and training. Increasing Veterans Workforce Participation The Government intends to provide funding for a period over four years from 2017/18 to initiatives that enable more veterans to participate in the workforce, including: a six-month pilot program to provide rehabilitation services to veterans while their claims are being processed improving access to incapacity payments and rehabilitation assistance to veterans with episodic mental health conditions increasing eligibility to the special or intermediate rate of the Disability Pension for veterans aged 65 years or older by removing the requirement for these veterans to demonstrate 10 years of continuous employment with the same employer. 6

7 Increasing the Liquid Assets Waiting Period The Government plans to increase the maximum Liquid Assets Waiting Period (LAWP) from 13 weeks to 26 weeks, effective from 20 September The LAWP is the number of a weeks a person is precluded from receiving Government income support. The LAWP applies to the following payments: Newstart Allowance Youth Allowance Austudy payment Sickness Allowance. The revised maximum LAWP (26 weeks) applies if liquid assets reach the following thresholds: Liquid Assets Current From 20 September 2018 Single (no dependants) $11,500 $18,000 Couples or Singles with dependants $23,000 $36,000 While a person can have more liquid assets available to them before the LAWP rules apply, a longer maximum waiting period means it will be more complicated to manage cash flow. It is unclear whether those who make a claim within 13 weeks to 20 September 2018 would be affected by the proposed new rules. Reinstatement of the Pensioner Concession Card The Government plans to re-issue the Pensioner Concession Card for those who lost their entitlement as a result of the asset test changes introduced from 1 January This will help eligible pensioners access state-based concessions on items such as council rates, vehicle registration and utilities discounts. New activity requirements from 20 September 2018 The Government intends to introduce changes to activity requirements for certain income support recipients. The changes include: aligning participation requirements for income support recipients aged between 30 to 49 with those aged under 30, this will increase their participation hours from 15 to 25 hours per week income support recipients aged 55 to 59 would only be able to meet up to 50 per cent of their participation requirements through volunteer activities. Currently they could meet a 100 per cent of their participation requirements via volunteering Income support recipients aged between 60 and Age Pension age would be required to meet a 5 hours per week activity requirement, but this can be met through volunteering. Currently the activity requirement is 15 hours per week. Enhanced residency requirements for pensioners From 1 July 2018, claimants will be required to have 15 years of continuous Australian residence before being eligible to receive the Age Pension or Disability support pension (DSP) unless they have either: 10 years continuous Australian residence, with five years of this residence being during their working life, defined as 16 years of age to Age Pension age, or 10 years continuous Australian residence, without having received an activity tested income support payment for a cumulative period of five years. Existing exemptions for DSP applicants who acquire their disability in Australia will continue to apply. 7

8 Reforms of Working Age payments The Government plans to close the Widow Allowance to new claimants from 1 January The Widow Allowance will completely cease on 1 January 2022, as those who would have been receiving the payment will have reached age 67 and naturally transition to the Age Pension. The Widow Allowance is available for females born on or before 1 July 1955, who have become widowed, divorced or separated since turning age 40 and have worked for less than 20 hours per week for a total period of no more than 13 weeks in the twelve months prior to making a claim. Those aged under Age Pension age will be expected to apply for other payments such as NewStart Allowance or the proposed JobSeeker Payment. The Government also intends to close the Bereavement Allowance to new claimants from 20 March Instead, it will be replaced by a new proposed payment referred to as the JobSeeker Payment. It appears that this proposed new payment is intended to consolidate seven types of payments that are currently available to those under Age Pension age. The Government has stated that recipients of NewStart Allowance and Sickness Allowance will be transitioned to the JobSeeker Payment from 20 March The following payments that are currently closed to new recipients will cease once all recipients reach Age Pension age: Partner Allowance to cease on 1 January 2022 Widow B Pension to cease on 20 March 2020 Wife Pension to cease on 20 March Tougher penalties for deliberate non-compliance by job seekers The Government plans to introduce a new Jobseeker Compliance Framework, which would include tougher penalties for deliberate failure by Jobseekers to meet their Work for the Dole requirements. This new framework is intended to apply from 1 July Under the proposed new framework, a new demerit style system will be introduced. Failure to comply, without a reasonable excuse, during what will be referred to as a Personal Responsibility Phase will result in payment suspension until reengagement and will accrue demerit points. Those who accrue four demerit points in six months will face escalating penalties. For more information please contact us. This document is for financial adviser use only it is not to be distributed to clients. Issued by IOOF Investment Management Limited (IIML) ABN IIML is a company within the IOOF group of companies consisting of IOOF Holdings Limited ABN and its related bodies corporate, and is not a registered Tax Agent. Examples contained in this communication are for illustrative purposes only and are based on the assumptions disclosed and the continuance of present laws and our interpretation of them. Whilst every effort has been made to ensure that this information is accurate, current and complete, neither IIML nor its related bodies corporate within the IOOF Group give any warranty of accuracy, reliability or completeness, nor accept any responsibility for any errors or omissions (including by reason of negligence) and shall not be liable for any loss or damage in connection with any use of, or reliance on, the information provided. The information in this and any attachments may contain confidential, privileged or copyright material belonging to us, related entities or third parties. If you are not the intended recipient you are prohibited from disclosing this information. If you have received this in error, please contact the sender immediately by return or phone and delete it. We apologise for any inconvenience caused. We use security software but dot not guarantee this is free from viruses. You assume responsibility for any consequences arising from the use of this . This may contain personal views of the sender not authorised by us. 8