‘Families and Fairness’ is how the Treasurer, Joe Hockey labelled his second federal budget. The hard line taken in the 2014 budget of tightening belts and ‘an end to the age of entitlement’ has been replaced with spending on child care, small business and infrastructure. In this special update of Financial sense, we have listed the main proposals of the 2015 Federal Budget, commenting on those measures which most impact upon you in your financial journeys.
BUSINESS TAX MEASURES
Multinational Enterprises: no Australian “Google tax”
Prior to the Budget and following the Senate Tax Inquiry which grilled companies such as Apple, Google and Microsoft on their tax structures. The Treasurer announced that Part IVA is to be amended to introduce a tax integrity multinational anti-avoidance law to deal with the activities of 30 identified multinational companies who the Government says are artificially avoiding having a taxable presence in Australia. These companies, the Government says, are diverting profits earned in Australia away from Australia to no or low tax jurisdictions such as Singapore, Ireland and other tax havens. The Treasurer tabled the Draft Tax Laws Amendment (Tax Integrity Multinational Anti-Avoidance Law) Bill 2015 which will apply to tax benefits obtained from 1 January 2016.
Small business tax rate cut to 28.5%
The Government announced, with effect from the 2015-16 income year (ie from 1 July 2015), a 1.5% cut in the company tax rate to 28.5% applying to small businesses ie, (turnover less than $2m). Those companies with an aggregated annual turnover of $2m or above will continue to be subject to the current 30% rate on all their taxable income. This measure will apply from 1 July 2015 meaning companies with PAYG instalments can benefit from their first payment after 1 July 2015. Interestingly, the current maximum franking credit rate for a distribution will remain unchanged at 30% for all companies, maintaining the existing arrangements for investors, such as self-funded retirees.
Small business tax discount for unincorporated small businesses
Only around 30% of small businesses are incorporated (ie around 70% are sole traders, trusts and partnerships), so the reduced 28.5% rate will have limited effect but in a welcome announcement, the Treasurer announced that, also with effect from 1 July 2015, individual taxpayers with business income from an unincorporated business that has an aggregated annual turnover of less than $2m will be eligible for a small business tax discount of 5% of the income tax payable on the business income received from an unincorporated small business entity capped at $1,000 per individual for each income year, and delivered as a tax offset through the taxpayer’s end of year tax return.
Small business asset accelerated depreciation write-off up to $20,000 per year
In a welcome measure for small business, the Budget announced that the existing write-off threshold of $1,000 (which was reduced from $6,500) will be dramatically increased such that they will be able to immediately write off assets they start to use or install ready for use, provided the asset costs less than $20,000 (per asset). Eligible assets could include items like cars, vans, machinery and computers. This will apply for assets acquired and installed ready for use between 7:30pm (AEST) 12 May 2015 and 30 June 2017. Assets valued at $20,000 or more (which cannot be immediately deducted) can continue to be placed in the small business simplified depreciation pool and depreciated at 15% in the first income year and 30% each income year thereafter. The pool can also be immediately deducted if the balance is less than $20,000 over this period (including existing pools).
“Netflix tax” to start 1 July 2017
It has long been held that the $1,000 GST exemption on foreign purchase is too generous to which effect the Government has announced that it will impose GST on offshore intangible supplies to Australian consumers with effect from 1 July 2017, labelled as the “Netflix” tax. The Government released draft legislation which contains the details of the changes. Broadly, the tax will be imposed from 1 July 2017 on all intangible supplies such as supplies of digital content, games, software – but will also extend to services performed offshore for customers in Australia. The liability for the GST will rest either with the supplier or the operator of an electronic distribution service, ie a reverse charge mechanism is not to be utilised.
PERSONAL TAX MEASURES
Personal tax rates: no change; Budget deficit levy not to be extended
The 2015-16 Budget did not make any changes to the current personal tax rates, although in the lead-up to the Budget, the Treasurer indicated that the 2% Budget deficit levy (tax) on incomes over $180,000 would not be extended beyond its initial 3 years. The levy was announced in last year’s Budget, has been legislated and applies for 3 years from 1 July 2014. It is due to cease at the end of the 2016-17 financial year.
Work-related car expenses simplified: 2 methods discontinued; only one flat rate
The Government says that nearly 4 million Australians claim a work-related car expense deduction each year. Currently, there are 4 different methods by which taxpayers can claim the tax deduction for work-related car expenses based on cents per kilometre, logbook method, the 12% of original value method, and one-third of actual expenses incurred. The Assistant Treasurer said the last 2 methods are used in less than 2% of cases, and the Budget confirmed that they would be discontinued as a means of streamlining the system and reducing compliance costs. That means only 2 methods will remain: cents per km and logbook method. The changes will apply from the 2015-16 income year.
Medicare levy low-income thresholds for 2014-15
From the 2014-15 income year, the Medicare levy low-income threshold for singles will be increased to $20,896 (up from $20,542 for 2013-14). For couples with no children, the threshold will be increased to $35,261 (up from $34,367 for 2013-14). The additional amount of threshold for each dependent child or student will be increased to $3,238 (up from $3,156). For single seniors and pensioners, the Medicare levy low-income threshold will be increased to $33,044 (up from $32,279). This threshold applies to those entitled to the seniors and pensioners tax offset (SAPTO).The measure will apply from 1 July 2014.
Dividend imputation – no changes
Pre-Budget speculation about the dividend imputation system came to nought, as the Budget did not announce any changes.
Eligibility for zone tax offset restricted
“Fly-in fly-out” and “drive-in drive-out” (FIFO) workers will cease to be eligible for the zone tax offset where their normal residence is not within a “zone”. Currently, to be eligible for the zone offset, a taxpayer must reside or work in a specified remote area for more than 183 days in an income year. It is estimated that around 20% of all claimants do not actually live full-time in the zones. For those FIFO workers whose normal residence is in one zone, but who work in a different zone, they will retain the zone offset entitlement associated with their normal place of residence. This measure will apply from 1 July 2015.
Tax and regulatory changes to ease burdens on start-ups
The Budget confirmed the Treasurer’s announcement of 6 May 2015 of a number of proposed tax and regulatory changes to support start-ups and entrepreneurship. Key measures, which form part of the Government’s Jobs and Small Business package, include deduction for professional costs re starting business, the ability to change business structures without CGT liability, easier access to crowd sourced equity funding, streamlined company registration and an upcoming regulation framework review.
Accelerated depreciation for primary producers re fencing, water facilities, etc
The Government will allow all primary producers to immediately deduct capital expenditure on fencing and water facilities such as dams, tanks, bores, irrigation channels, pumps, water towers and windmills. The Government will also allow primary producers to depreciate over 3 years all capital expenditure on fodder storage assets such as silos and tanks used to store grain and other animal feed. Currently, the effective life for fences is up to 30 years, water facilities is 3 years and fodder storage assets is up to 50 years. The changes will commence on from 1 July 2016.
No major super tax changes – but reform processes loom
The Government did not announce any major new superannuation measures in the Budget. Issues of equity and fairness regarding superannuation were looked at in the Tax Discussion Paper and no doubt will feature in the options paper to be released later in 2015. Despite ruling out new “taxes” on superannuation, the Government has left the door open for any urgent legislation required for “integrity measures” or to provide certainty etc.
Defined benefit super schemes: Government to close loophole on pension income test
The Government confirmed that a 10% cap will apply to the “deductible amount” for pension income received from a defined benefit superannuation scheme for the purposes of the social security income test. This measure was previously announced on 7 May 2015 by the Minister for Social Services, Scott Morrison. The proposed 10% cap on the deductible amount for defined benefit superannuation schemes seeks to close an unintended loophole that opened up in 2007.
SMSFs and limited recourse borrowings – no change
The Government did not make any Budget announcements in relation to the Murray Financial System Inquiry (FSI) recommendation to remove the borrowing exception in s 67A of the SIS Act for limited recourse borrowing arrangements (LRBAs) on a prospective basis. Instead, the Prime Minister indicated in April 2015 that the Government would “soon be responding to the Murray report into the financial system” following consultation with industry and consumers.
Early access to super for terminal illness
The Government confirmed that it will extend early access to superannuation for people with a terminal medical condition (TMC). Under the current early access to superannuation arrangements, a person with a terminal illness is required to get 2 medical practitioners to certify that they are likely to die within 12 months to gain unrestricted tax free access to their superannuation balance. The Government will amend the relevant regulations to change the life expectancy “certification period” from 12 months to 24 months. According to the Government, this will give terminally ill patients earlier access to their superannuation.
SOCIAL SECURITY MEASURES
Age Pension Assets Test
The Government confirmed its previous announcement on 7 May 2015 that the Age Pension assets test threshold for a single homeowner will be increased to $250,000 (up from $202,000) and $375,000 for a homeowner couple (up from $286,500) from 1 January 2017. The assets test threshold (or assets free area) for non-homeowners will be increased to $200,000 more than homeowner pensioners, ie $450,000 (single) and $575,000 (couple). However, the assets test taper rate at which the Age Pension begins to phase out will be increased from $1.50 of pension per fortnight to $3.00 of pension for each $1,000 of assets over the relevant assets test threshold. This means that the maximum value of assets that a homeowner couple can hold to qualify for a part pension will be reduced from $1.151m to approximately $823,000 (or $547,000 for a single homeowner instead of the current $775,500).It is estimated that as a result of the announced changes, approximately 50,000 part-pensioners will receive the full pension, approximately 91,000 current part-pensioners will no longer qualify for the part pension from January 2017 and a further 235,000 will have their part-pension reduced.
Major childcare payments revamp: $7,500 rebate cap to be abolished under $185,000 income
In the Budget, the Government announced that from 1 July 2017, it will introduce a new and simpler mainstream Child Care Subsidy through the following measures:
- Abolition of the current Child Care Benefit, Child Care Rebate and Jobs, Education and Training Child Care Fee Assistance programmes.
- Introduction of a single means tested Child Care Subsidy for all families, subject to a new activity test for up to 100 hours of subsidised care per child per fortnight, paid directly to approved care service providers to make it easier for families.
- For family incomes of up to approximately $65,000, the Child Care Subsidy will be 85% per child of the actual fee or a benchmark price, whichever is lower. This will reduce to 50% for family incomes of approximately $170,000 and above at the time of implementation.
- Families on incomes under $185,000 will no longer have a cap on the amount of subsidy they receive. [The cap is currently $7,500.]
- A cap of $10,000 per child at the time of introduction will be established for the total value of subsidies for family incomes of $185,000 and above.
- A new activity test will be established:Parents working between 8 and 16 hours per fortnight will eligible for up to 36 hours of childcare, Parents working between 17 and 48 hours per fortnight will be eligible for up to 72 hours of childcare and Parents working 49 hours or more per fortnight will be eligible for up to 100 hours of childcare.
- Up to 24 hours per fortnight will also be provided to children from families with incomes less than approximately $65,000 per year who do not meet the activity test to ensure continued access to early childhood learning. The 24 hours is equivalent to two 6-hour sessions, which is the same period provided for K-2 public school education. Service providers will have full flexibility and discretion in how these hours of support are delivered.
- All child care subsidies and support will remain linked to immunisation requirements which from 1 January 2016 will be strengthened under the Government’s “no jab, no pay” policy. The only exemption to this policy will be on medical grounds.
These additional investments are proposed to be funded by the savings measures for Family Tax Benefits announced in last year’s Budget [note that many of these measures are in legislation stalled before the Senate eg in the Social Services and Other Legislation Amendment (2014 Budget Measures No 4) Bill 2014 – the measures include proposals to:
- from 1 July 2015 – maintain at their current levels for 3 years the income free areas for all working age allowances (other than student payments), and the income test free area for parenting payment single;
- from Royal Assent – index Parenting Payment Single to the CPI only, by removing benchmarking to Male Total Average Weekly Earnings;
- from 1 July 2015 – maintain at their current levels several family tax benefit free areas for 3 years;
- from 1 January 2015 – maintain at their current levels for 3 years the income free areas and other means-test thresholds for student payments, including the student income bank limits;
- from 1 July 2015 – maintain the standard FTB child rates for 2 years in the maximum and base rate of family tax benefit Part A and the maximum rate of family tax benefit Part B;
- from 1 July 2015 – revise the family tax benefit end-of-year supplements to their original values and cease indexation;
- from 1 July 2015 – limit family tax benefit Part B to families with children under 6 years of age, with transitional arrangements applying to current recipients with children above the new age limit for 2 years;
- from 1 July 2015 – introduce a new allowance for single parents on the maximum rate of family tax benefit Part A for each child aged 6 to 12 years inclusive, and not receiving Family Tax Benefit Part B;
- Extend and simplify the ordinary waiting period for all working age payments from 1 January 2015.
Paid parental leave – double-dipping to be eliminated
The Treasurer said the Government will stop people from claiming parental leave payments from both the Government and their employers. This measure will apply from 1 July 2016. The Treasurer said people on the minimum wage (around $640 per week) will still get $11,500 for the 18-weeks that they’re off on parental leave, but people will not be able to claim it both from their employer and from the Government. In cases where individuals get less generous parental leave entitlements from their employer, the Government said it will top up the amount paid to be equal to the full amount available under the existing scheme ie $11,500.
Seniors health card guaranteed
Mr Morrison said that all people affected by the scaling back of the maximum asset threshold will be guaranteed eligibility for the Commonwealth Health Seniors Card (CSHC) or Health Care Card. Pensioners who lose pension entitlement on 1 January 2017 as a result of these changes will automatically be issued with a CSHC or a Health Care Card for those under Age Pension age. The CSHC is an important benefit for many seniors (including self-funded retirees who do not qualify for the Age Pension) as it provides discounts (or concessions) on PBS prescription medicines, bulk-billed doctor appointments and cheaper out-of-hospital medical expenses through the Medicare Safety Net. To qualify for the CSHC a person’s annual adjusted taxable income (ATI) is subject to a threshold income test (but there is no asset test). The CSHC income threshold is $51,500 for singles (and $82,400 for couples) from 20 September 2014. Note that superannuation account-based pensions are subject to the social security deeming rules for the purposes of determining eligibility for the CSHC from 1 January 2015. However, account-based pensions and annuities in place before 1 January 2015 for existing CSHC cardholders are exempt from the new arrangements provided that such income support continues uninterrupted from 1 January 2015.
Pension indexation to CPI dropped
The Government announced that it will be dropping its 2014 Budget proposal to index the Age Pension to CPI. Those changes, contained in the Social Services and Other Legislation Amendment (2014 Budget Measures No 5) Bill 2014 (still before Parliament as at 12 May 2015) will now not proceed. Rather, pension and pension equivalent payment rates will continue to be indexed under current arrangements, ie by the higher of the increases in the CPI or the Pensioner and Beneficiary Living Cost Index (PBLCI) and benchmarked against Male Total Average Weekly Earnings (MTAWE). The measures will commence from 1 January 2017.
Social security deeming rate thresholds – reset will not proceed
The Government will not proceed with the 2014-15 Budget measure which had proposed to reset the social security income test deeming rate thresholds. The Government had previously proposed to reset the deeming rate thresholds to $30,000 for singles and $50,000 for couples from 20 September 2017. Those proposed changes, contained in the Social Services and Other Legislation Amendment (2014 Budget Measures No 5) Bill 2014 (still before Parliament as at 12 May 2015) will now not proceed. The deeming rules assume all financial investments earn a certain rate of income, regardless of the income actually generated.
Income test free areas – pause to thresholds will not proceed
The Government will not proceed with elements of the 2014-15 Budget measure which had proposed to maintain for 3 years from 1 July 2017 the current income test free areas for all pensions (other than Parenting Payment single). Those proposed changes, contained in the Social Services and Other Legislation Amendment (2014 Budget Measures No 5) Bill 2014 (still before Parliament as at 12 May 2015) will now not proceed. Instead, the pension income test free areas and deeming thresholds will continue to be indexed annually by the CPI. Major pension related payments include the Age Pension, Carer Payment, Disability Support Pension, and the Veterans’ Service Pension.
Age Pension access while overseas – Australian working life residence (35 years) rule
The Government will reduce from 26 weeks to 6 weeks the period that some recipients of the Age Pension, Wife Pension, Widow B Pension and the Disability Support Pension can be paid their full basic means-tested rate while absent from Australia. After 6 weeks absence from Australia, pensioners who have lived in Australia for less than 35 years will be paid at a reduced rate proportional to their period of Australian Working Life Residence (AWLR). The AWLR is the period a person has lived in Australia, as a permanent resident, between the age of 16 years and Age Pension age. Pensioners overseas on the date of implementation will not be affected by this change unless they return to Australia and make a subsequent trip overseas. The measure will apply from 1 January 2017
Aged Care – means testing; home care; short-term restorative care; etc
The Government will align aged care means testing arrangements for residents who pay their accommodation costs by periodic payments with the arrangements that currently apply to those residents who pay via a lump sum. According to the Government, this will remove the rental income exemption under the aged care means test for aged care residents who are renting out their former home and paying their aged care accommodation costs by periodic payments. Existing protections such as annual fee caps and lifetime fee caps will remain. The measure will apply to new residents entering aged care from 1 January 2016.
Home Care Programme
The Government will increase consumer choice and flexibility for older Australians in receipt of a Commonwealth funded Home Care Package. From 1 February 2017, Home Care Packages will be allocated directly to consumers by the My Aged Care Gateway rather than to service providers through the Aged Care Approvals Round. This measure is to be implemented from 1 February 2017.
Family Tax Benefit Part A large family supplement to cease
The payment of the additional Family Tax Benefit (FTB) Part A Large Family Supplement will cease from 1 July 2016. However, families will continue to receive a per child rate of FTB Part A for each eligible child in their family.