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Budget Update 2018

Last night the Federal Government handed down its Budget for the 2018 –19 year, which is likely to be the final Budget before the next federal election. It’s therefore hardly surprising that the Coalition promised to deliver a suite of tax cuts for individuals at various income levels, as well as a range of incentives to support older Australians.

Some key Budget announcements that we feel our clients should be aware of include:

  • immediate tax breaks for low-to-middle income earners and future tax cuts for higher earners
  • a limited exemption from the work test for super contributions, for workers aged 65 – 74 who have super balances below $300,000
  • new means test rules for lifetime retirement income streams to help reduce longevity risk
  • an increase to the maximum number of SMSF members from 4 to 6, to provide more flexibility for larger families

It’s important to remember that the Budget announcements are still only proposals at this stage. Each of the proposals must be passed by parliament in due course before they’re legislated. We will also have 2 or more Federal elections and 7 budgets before all of the taxation changes are implemented over the next 7 years, so we may not see these tax changes come into effect as proposed.

We would also like to make a brief comment on the Royal Commission.

It is extremely disappointing to us to see that there has been such poor behavior within the Australian Financial Services community. Particularly from large, trusted institutions.

Please rest assured that Lifestyle Financial Services and all our group companies will always act in your best interest. Our clients are our number one priority.

We are continually evaluating the financial services environment to establish which platforms, fund managers and service providers are most appropriate for our clients. This may result in changes over time, which we will discuss with you upon review.

Change of address:

We are delighted to announce that, as of Monday the 14th of May, all Lifestyle group companies including Domane Financial Advisers, Domane Mortgages, Lifestyle Financial Services and Wise Planners will be operating out of new office premises.

We will all be located at Suite 4.01, Level 4, 9 Help Street, Chatswood.

Telephone and email contact details will all remain unchanged.

Taxation – Seven-year personal income tax plan

The Government will introduce a Personal Income Tax Plan over a seven-year period that involves 3 steps:

Step 1: 2018-19 to 2021-22

  • Introduction of a Low and Middle-Income Tax Offset of up to $530 p.a, in addition to Low Income Tax Offset (LITO), from 2018-19 to 2021-22
  • Extend the top threshold for the 32.5% personal income tax bracket from $87,000 to $90,000

Step 2: 2022-23 to 2023-24

  • Extend the top threshold for the 19% personal income tax bracket from $37,000 to $41,000
  • Extend the top threshold for the 32.5% personal income tax bracket from $90,000 to $120,000
  • Increase LITO from $445 to $645

Step 3: 2024-25 and later financial years

  • Removal of the 37% personal income tax bracket
  • Extend the top threshold for the 32.5% personal income tax bracket from $120,000 to $200,000

Below is an analysis of the Personal Income Tax Plan in detail:

Step 1: 2018-19 to 2021-22

The Government will introduce a new tax offset called the Low and Middle-Income Tax Offset (LMITO). This is in addition to the Low-Income Tax Offset (LITO).

LMITO is a non-refundable tax offset of up to $530 per annum payable to Australian residents on low and middle incomes. The offset will be available for the 2018-19, 2019-20, 2020-21 and 2021-22 income years and will be received as a lump sum on assessment after an individual lodges their tax return.

Low and Middle Income Tax Offset

Taxable income (TI)Change in offset (CI)Maximum offset
$0 - $37,000Nil$200
$37,001 - $48,000(TI - $37,000) x 0.03$200 + CI
$48,001 - $90,000Nil$530
$90,001 - $125,333(TI - $90,000) x 0.015$530 - CI

Changes to personal income tax bracketsThe Government will also increase the top bracket of the 32.5% personal income tax bracket from $87,000 to $90,000.

Changes to personal income tax brackets

2017-18 (Current) 2018-19 to 2021-22 (Proposed ) 
Taxable incomeRateTaxable incomeRate
$0 - $18,2000%$0 - $18,2000%
$18,201 - $37,00019% over $18,200$18,201 - $37,00019% over $18,200
$37,001 - $87,000$3,572 + 32.5% over $37,000$37,001 - $90,000$3,572 + 32.5% over $37,000
$87,001 - $180,000$19,822 + 37% over $87,000$90,001 - $180,000$20,797 + 37% over $90,000
$180,001 +$54,232 + 45% over $180,000$180,001 +$54,097 + 45% over $180,000

The following table details the tax savings for 2018-19 to 2021-22 compared to the current tax laws:

Tax Savings

Taxable incomeTax savings*
$20,000$0
$30,000$200
$40,000$290
$50,000$530
$60,000$530
$70,000$530
$80,000$530
$90,000$665
$100,000$515
$110,000$365
$120,000$215
$130,000$135

*Incorporates increase in Medicare Levy thresholds from 1 July 2018

 

Step 2: 2022-23 to 2023-24

  • Extend the 19% personal income tax bracket from $37,000 to $41,000.
  • Extend the 37% personal income tax bracket from $90,000 to $120,000
  • Increase LITO from $445 to $645

Changes to personal income tax brackets

2018-19 to 2021-22 (Step 1) 2022-2023 to 2023-2024 (Step 2) 2024-25 and future years (step 3) 
Taxable incomeRateTaxable incomeRateTaxable incomeRate
$0 - $18,2000$0 - $18,2000$0 - $18,2000
$18,201 - $37,00019% over $18,200$18,201 - $37,00019% over $18,200$18,201 - $41,00019% over $18,200
$37,001 - $87,000$3,572 + 32.5% over $37,000$37,001 - $90,000$3,572 + 32.5% over $37,000$41,001 - $120,000$4,332+ 32.5% over $41,000
$87,001 - $180,00019,822 + 37% over $87,000$90,001 - $180,000$20,797+ 37% over $90,000$120,001 - $180,000$30,007 + 37% over $120,000
$180,001 +$54,232 + 45% over $180,000$180,001 +$54,097 + 45% over $180,000$180,001 +$52,207+ 45% over $180,000

Changes to Low Income Tax Offset

2017-18 to 2021- 2022  2022-23 (Proposed)  
Taxable income (TI)Reduction in offset (RI)Maximum offsetTaxable income (TI)Reduction in offset (RI)Maximum offset
$0 - $37,000Nil445$0 - $37,000Nil645
$37,001 - $66,666(TI -$37,000) x 0.015$445 - RI$37,001 - $41,000(TI - $37,000) x 0.065$645 - RI
$41,001 - $66,667(TI - $41,000) x 0.015$385 - RI
$66,667+445Nil$66,667+645Nil

Tax savings from 1 July 2022 compared to current tax rates (2017-18 FY)

Taxable incomeTax savings (Step 2) compared to 2017-18
$20,000$0
$30,000$200
$40,000$455
$50,000$540
$60,000$540
$70,000$540
$80,000$540
$90,000$675
$100,000$1,125
$110,000$1,575
$120,000$2,025
$130,000$2,025

Step 3: 2024-25 financial year and future years Tax savings from 1 July 2022 compared to current tax rates (2017-18 FY)

  • Remove the 37% tax bracket entirely
  • Extend the top threshold of the 32.5% personal income tax bracket from $120,000 to $200,000.

Changes to personal income tax brackets

2018-19 to 2021-22 (Step 1) 2022-2023 to 2023-2024 (Step 2) 2024-25 and future years (step 3) 
Taxable incomeRateTaxable incomeRateTaxable incomeRate
$0 - $18,2000$0 - $18,2000$0 - $18,2000
$18,201 - $37,00019% over $18,200$18,201 - $41,00019% over $18,200$18,201 - $41,00019% over $18,200
$37,001 - $90,000$3,572 + 32.5% over $37,000$41,001 - $120,000$4,332+ 32.5% over $41,000$41,001 - $200,000$4,332 + 32.5% over $41,000
$90,001 - $180,000$20,797+ 37% over $90,000$120,001 - $180,000$30,007 + 37% over $120,000
$180,001 +$54,097 + 45% over $180,000$180,001 +$52,207+ 45% over $180,000$200,001 +$56,007 + 45%

Tax savings from 1 July 2024 compared to current tax rates (2017-18 FY)

Tax savings from 1 July 2024 compared to current tax rates (2017-18 FY)

Taxable incomeTax savings (Step 3) compared to 2017-18
$20,000$0
$30,000$200
$40,000$455
$50,000$540
$60,000$540
$70,000$540
$80,000$540
$90,000$675
$100,000$1,125
$110,000$1,575
$120,000$2,025
$130,000$2,475
$140,000$2,925
$150,000$3,375
$160,000$3,825
$170,000$4,275
$180,000$4,725
$190,000$5,975
$200,000$7,225
$210,000$7,225
$220,000$7,225
$230,000$7,225
$240,000$7,225

Medicare levy

Effective 1 July 2019

The Government will not increase the Medicare Levy rate from 2 to 2.5 per cent of taxable income as legislated to commence from 1 July 2019. Consequential changes to other tax rates linked to the top personal tax rate such as the fringe benefits tax rate, will also not proceed.

Increasing the Medicare Levy low-income thresholds

Effective 1 July 2018

The Government will increase the Medicare levy low-income thresholds for singles, families, and seniors and pensioners from the 2017-18 income year.

The following table compares the level of taxable income below which no Medicare Levy is payable.

2016-172017-18 
Taxpayers entitled to seniors and pensioner tax offset
Individual$34,244$34,758
Married or sole parent$47,670$48,385
For each dependent child or student, add:$3,356$3,406
All other taxpayers
Individual$21,655$21,980
Couple/sole parent (family income)$36,541$37,089

Superannuation
Superannuation work test exemption for retirees

Effective 1 July 2019

 The Government intends to amend the superannuation contribution rules to allow people aged 65 to 74 that have a total superannuation balance of under $300,000 to make voluntary contributions for 12 months from the end of the financial year they last satisfied the work test. This will give people more time to make contributions to super after they have retired and finished working.

For example, if someone retired on 30 March 2020, they would be able to make voluntary concessional and/or non-concessional contributions during the 2020-21 financial year where their total superannuation balance was under $300,000 on 30 June 2020. In this case, the normal contribution caps will apply, including the ability to make additional contributions under the catch-up concessional contribution rules.

SMSF membership increasing to six

Effective 1 July 2019

 The Government will amend the definition of Self-Managed Superannuation Funds (SMSFs) in the SIS Act to increase the maximum number of members in new and existing funds from four to six.

This change is also proposed to apply to Small APRA Funds from the same date.

Currently, only 7% of SMSF’s have more than 2 members, so this may only have a minor uptake. *ATO SMSF quarterly statistical report – December 2017

Three year audit cycle for some SMSFs

Effective 1 July 2019

 The Government will allow certain SMSFs to move from an annual to a three-yearly audit cycle where they have:

  • three consecutive years of clear audit reports, and
  • lodged the fund’s annual returns in a timely

Preventing inadvertent concessional cap breaches

Effective 1 July 2018

 The Government will allow individuals whose income exceeds $263,157 and who have multiple employers to nominate that their wages from certain employers are not subject to the superannuation guarantee (SG).

 

The government says this measure is being introduced to allow eligible individuals to avoid unintentionally breaching the $25,000 annual concessional contributions cap as a result of multiple compulsory SG contributions. In this case, the employee will be able to negotiate to receive additional salary and wages to make up for the lost SG contributions.

 

Personal deductible contribution notice of intent integrity changes

Effective 1 July 2018

The ATO will modify income tax returns to require individuals to confirm they have provided a valid notice of intent to their fund when claiming a tax deduction for their personal contributions. The ATO will also provide guidance to individuals on how to comply if they have not yet done so.

The Government says this measure will ensure that any deductible contributions are appropriately taxed by superannuation funds and enable the ATO to deny deductions to individuals who do not comply with the NOI requirements.

Changes to insurance in superannuation

Effective 1 July 2019

The Government will change the insurance arrangements for certain categories of superannuation members. Insurance within superannuation will move from a default framework to be offered on an opt-in basis for the following groups of members:

  • low balances of less than $6,000
  • under the age of 25 years
  • whose accounts have not received a contribution in 13 months and are

The government says these changes are required to protect the retirement savings of young people and those with low balances by ensuring their superannuation is not unnecessarily eroded by premiums on insurance policies they do not need or are not aware of. The government also says the changes will reduce the incidence of duplicate cover.

Impacted members will have approximately 14 months from budget night to decide whether they will opt-in to the existing cover or allow it to switch-off.

It is unclear whether they will be able to choose to opt-in and get automatic cover at a later date – so this could cause some future problems.

 

Capping fees, banning exit fees and reuniting small and inactive superannuation accounts

Effective 1 July 2019

The Government has announced it will introduce a 3% annual cap on passive fees charged by superannuation funds on accounts with balances below $6,000 and will ban exit fees on all superannuation accounts.

The Government also announced it will require all inactive superannuation accounts with balances below $6,000 to be transferred to the ATO. The ATO will then use data matching to proactively reunite these inactive accounts with a member’s active account, where possible.

Measures for older Australians

Increase to Pension Work Bonus

Effective 1 July 2019

 The Pension Work Bonus encourages age/service pensioners to remain in the workforce by disregarding an amount of employment income from the pension income test.

Under current rules, the Pension Work Bonus allows pensioners to disregard up to the first $250 p.f. of employment income. Under the proposed changes, the amount of employment income that will be disregarded will increase to $300 p.f.

Pensioners will continue to accrue unused amounts of the fortnightly Pension Work Bonus, which can exempt future earnings from the pension income test. The maximum accrual amount will increase from $6,500 to $7,800.

In addition, the Pension Work Bonus will be extended to earnings from self-employment.

Extending eligibility to the Pension Loan Scheme

Effective 1 July 2019

 The Pension Loans Scheme is a voluntary reverse mortgage provided by Centrelink. Under current rules, the scheme allows clients to “top-up” their age pension up to the maximum rate where they receive a part pension due to the income or asset test, or do not receive an age pension under either the income or assets test (but not both). The amount of “top-up” payments are a loan secured against Australian real estate which must be repaid when the property is sold or the client passes away.

 

From 1 July 2019, the Government will expand the scheme by:

  • extending eligibility to all clients of age pension age including maximum rate age pensioners, and
  • increasing the maximum amount of “top-up” payments from 100% to 150% of the maximum rate of age pension.

Maximum rate age pensioners will be able to increase their income by up to $11,799 (singles) or $17,787 (couples) per year.

While the overall maximum amount of “top-up” payments is 150% of the maximum rate of Age Pension, the actual limit depends on the clients age, how long they intend to receive payments, whether they are single or partnered, the value of their home and the rate of Age Pension they receive. These restrictions ensure they do not have to pay back more than their home is worth.

The Budget paper states that the Pension Loans Scheme will be available to “everyone over Age Pension age” which implies that self-funded retirees will have access to the scheme.

Currently the Pension Loans Scheme is not widely used.   It will be interesting to see whether the proposed changes increase the number of clients who utilise the scheme.

Expansion of Home Care

Effective 1 July 2018

The Government will increase the number of high level home care packages that will be available over the next four years by 14,000. This increase is in addition to the 6,000 high level home care packages that were previously announced.

Residential aged care funding

Effective 1 July 2018

 The Government will increase funding for residential aged care and short-term restorative care places in 2018-19 by $60 million to support new places.

In addition, they will provide $82.5 million to support mental health services for residents of aged care facilities as well as $61.7 million to make the My Aged Care website easier to use with simpler assessment forms for people to access aged care services.

National register of enduring powers of attorney

Effective date not specified

 As part of a range of measures to protect the rights of older Australians from abuse, the Government will work with the States and Territories to establish a National Register of Enduring Powers of Attorney.

The advice contained herein does not take into account your particular objectives, needs or financial situation. Before making a decision regarding the acquisition or disposal of a financial product you should assess whether the advice is appropriate to your objectives, needs or financial situation. You should consider talking to a financial adviser before making a financial decision. No responsibility is taken for any person acting on the information provided. Persons doing so, do so at their own risk. Before acquiring a financial product a person should obtain a Product Disclosure Statement  (PDS) relating to that product and consider the contents of the PDS before making a decision whether to acquire the product. This document has been prepared by Lifestyle Financial Services (ABN 85 065 161 391) who is a Corporate Representative of Financial Wisdom Limited ABN 70 006 646 108, AFSL 231138, a wholly-owned, non-guaranteed subsidiary of Commonwealth Bank of Australia ABN 48 123 123 124. While care has been taken in the preparation of this document and the associated articles, no liability is accepted by Financial Wisdom, its related entities, agents and employees for any loss arising from reliance on this document.

2 Comments

2 thoughts on “Budget Update 2018

  1. Sean says:

    Thanks, it’s very informative

    1. Mari says:

      Hi Sean,

      Thank you for your message, we are glad that you enjoyed our article. We also run monthly webinars with guest presenters focused on different topics and they are free of charge. This month’s webinar will be focusing on tax planning, here is the link if you wish to join us https://attendee.gotowebinar.com/register/383579316119705603

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