4th May, 2016
Federal treasurer, Scott Morrison, presented his maiden budget in the House of Representatives on Tuesday, 3rd May, 2016.
Here are the key points of this budget.
- Lifetime cap of $500,000 for non-concessional contributions (NCC) made on/after 1/7/2007
- Lifetime Cap will not be affected if there was already more than 500,000 NCC prior to 7.30 PM, 3/5/16.
- This new NCC cap will replace previous contributions cap of up to $180,000/year (or $540,000 every three years for those who are less than 65 years age.
- Catch up concessional contributions allowed if total superannuation balance is less than $500,000, and if they did not reach concessional contributions cap in previous years.
- From 1/7/17, no tax exemption on earnings od assets supporting Transfer to Retirement Income Streams (TRIS). Such earnings will be taxed at 15%.
- Currently, Superannuation account balance of any amount is tax free when it is in Pension phase. This will change. Only $1.6 million of this money into Pension phase will be tax free and money in excess of $1.6 million will be deemed to be in accumulation phase of superannuation and their earnings will be taxed at 15%.
- Concessional contributions cap will be $25000 from 1/7/207. Until then, it will remain unchanged at $30000 for aged less than 50 years and $35000 for those who are older than 50 years.
- Some restrictions to be removed for voluntary or NCC contributions for people aged 65-74 years.
- Threshold for high Income earners who are required to pay 15% tax on contributions will be reduced to $250,000 from $300,000 from 1/7/17.
- Lump sum payments (up to $195,000 currently) during pension phase will be removed.
- Low Income Superannuation Tax Offset for those with taxable income of up to 37,000, with a cap of $500.
Medicare Levy low Income thresholds for 2015-16 increased slightly for indivisuals and families.
Personal Income Tax rates:
- 32.5% income tax threshold increased from $80,000 to $87,000. This will benefit about 500,000 taxpayers.
Increased Small Business Income Tax Offset (SBITO):
- It will be increased to 8% from current 5%. This is available to individuals in receipt of income from an unincorporated small business of less than $2 million turnover.
- 8% will be applicable for 8 years.
Company Tax rate:
- By 1/7/26, it will be 25%.
- It will be reduced to 27.5% from 1/7/16 for companies with less than $10 million turnover/year.
- Turnover threshold for 27.5% company tax will increase every year. It will be $25 million for year 2017-18 and $50 million for 2018-19.
- Turnover threshold keeps increasing as years pass by.
Small Business Entity (SBE) threshold increased:
- Threshold turnover increased to $10 million from current $2 million.
- Immediate deduction for assets purchased for less than $20,000 per item until 30/6/17.
Tax Avoidance Taskforce:
- $678.9 millions provided to ATO to ensure compliance activities targeting multinationals, large public and private groups and high wealth individuals.
- 40% Diverted Tax penalty for multinational corporations that attempt to shift their Australian profits offshore.
Investment on Science, innovation and research:
- investing $9.7 billion in innovation, science and research to support Australia’s transition to a modern 21st century economy
Youth employment package:
$840 million in an innovative Youth Employment Package to help up to 120,000 young people over four years secure jobs.
GST on imported goods:
- GST will be imposed to low value imported goods from 1/7/17.
- Overseas suppliers with Australian sales of $75,000 or more will need to register for, collect and remit the GST.
Better protection of Tax whistle-blowers from 1/7/18.
No change in Negative gearing and Capital Gain Tax (CGT)
No change in work related expenses provisions
Cigarettes to become more expensive with higher excise duty (12.5% increase/year for 4 years).
Freeze on indexation on Medicare benefits for next 2 years:
- it does not make any sense because everything which is required for medical/health servicing is becoming more expensive, but fees for such services are frozen. It is unfair.
- Considering the circumstances and proximity to election on 2/7/16, it is overall a safe and non-controversial, and overall a GOOD budget.
- Changes made in superannuation have impacted severely for some people, who are in the high wealth individuals category. This is the outcome of populism and with the purpose to counter scare campaign by the Opposition. These individuals (top 4% of Australians) are significant contributors to the economy, investment and businesses which create employment. These changes are quite drastic, and it would have been better to not bring such drastic changes (at least the magnitude and extent) affecting these individuals.
- With substantial changes in superannuation and no changes in negative gearing and CGT, there is a risk that such high wealth individuals will divert their investment into real estate, with the potential outcome of higher prices. This may create obstacles for the entry of new home owners into the residential market.
- Reduction of concessional contributions to $25,000 is a wrong idea because our aim is to encourage Australians to save money for retirement. It should have instead been increased to $50,000, which was the case a few years ago before Wayne Swan reduced it.
- Life time cap on NCC of $500,000 is not enough. It should have been at least $1 million.
- Companies are business and investment entities, used by most of the participants in the economic activities. This includes small business entities. They need to be supported more vigorously. Small businesses are a significant contributor of employment and business activities in Australia. Company tax reduction to 25% should have been done at a faster rate to accelerate business activities and job creation, and to make Australia an attractive place for investment from everywhere including overseas.
- My view is that the small business entities should be only those which have turnover of less than $2 million (Max $5 million), not $500 million or $1 billion.
- It appears that some people consider high earners as a punching bag. They forget that these are the very people who contribute in the economic activities of the nation significantly, creating jobs and paying taxes to be used for welfare, roads, education and hospitals. High earners need to be encouraged and supported, not used as a punching bag and disincentivized. Labor and Greens tend to do this all the times, but it appears that the Coalition is also now inclined that way to avoid the scare campaign by the opposition.
- Recognising that elections are happening on 2/7/16 and Government had to tread carefully for the sake of its own election, I can see why this budget is the way it is. It is a minimalist budget, except for superannuation changes, and reduces the chance of scare campaign against it like what happened after 2014 Budget.
- With mining boom truly over, Australia obviously needs to adapt to new realities and Australians will need to live within their means. Entitlement mentality will need to go. We have to accept that money does not grow on trees. Australia will need to face up the challenges to raise money for the funding of schools, hospitals and education. I support the commentary and proposal by Mike Baird, NSW Premier, in regards to hiking GST to raise money for the funding of essential services and to reduce budget deficits. The Government and the Opposition will need to discuss and come to a bipartisan agreement about our economy so that funding for services can be assured and quality of life of Australians can be guaranteed for years to come.
I have taken many points from a report published by NTAA (National Tax & Accountants’ Association newsletter sent out to their members, dated 3/5/16. I received a copy of this report from my accountant. NTAA is gratefully thanked and acknowledged.
We will hear the Budget reply and economic policies from the Leader of Opposition, Bill Shorten, on Thursday, 5th May, 2016.
*I am not a financial professional. This Post should not be taken as an advice. Please consult your accountant for any matter which might have relevance to you and your circumstances.
Dr Yadu Singh