Investor InsightsNews > Federal Budget 2018-19: Tax and super reforms.

Federal Budget 2018-19: Tax and super reforms.

July 2018

Tax relief, and super reforms particularly for those with low balances, were at the centre of the Federal Budget, writes Gayle Bryant.

There were a few surprises in the Federal Government’s 2018 Budget (the ‘budget’) around superannuation. Essentially, in its reforms, the government will make it easier for people to cost-effectively manage their super through six main measures:

  • superannuation accounts of $6,000 will have fees capped at 3 per cent a year
  • fees to exit a superannuation fund will be banned
  • a new requirement will be introduced requiring inactive super accounts with balances less than $6,000 to be transferred to the Australian Taxation Office (ATO)
  • young people, or those with an inactive or a low balance, will have to opt-in to life insurance
  • recent retirees will be allowed to make additional super contributions through a work-test exemption
  • members working for multiple employers, who earn more than $263,157, will be able to nominate that income from certain employers is not subject to the superannuation guarantee. This measure will allow these members to avoid unintentionally breaching the $25,000 concessional contributions cap as a result of multiple compulsory superannuation guarantee contributions.

It is important to note that at the time of writing these changes were not yet law and subject to change.

Introduced as part of the government’s ‘Protecting your super’ package, the ban on exit fees will apply from 1 July 2019, and will cover all super accounts regardless of age or balance.

For low-balance super accounts (defined as a balance below $6,000) passive fees can only amount to a maximum 3 per cent of the balance, which will help stop fees eroding such small balances.

For those who haven’t consolidated their accounts, the government will start taking proactive steps to do it for you. In his budget speech, Federal Treasurer Scott Morrison announced the ATO will proactively reunite people’s inactive or lost super and have it sent to their active super accounts. And inactive super accounts with balances less than $6,000 will be transferred to the ATO.

From 1 July 2019, insurance within super will become an opt-in model for members aged under 25 and those with low balances.

The move will also apply to members who have not made a contribution in the previous 13 months and are inactive.

With the changes to insurance, Morrison said young people would no longer have to pay for insurance they don’t want or need. But, the Association of Superannuation Funds of Australia chief executive officer Martin Fahy warned “many young people have dependants and financial commitments so in the instance of a tragic event occurring, particularly disablement early in life, having insurance in place is extremely valuable”.

Additionally, from 1 July 2019, those aged 65 to 74 with a total super balance below $300,000, may rely on an exemption to the work test to voluntarily contribute to superannuation. This exemption applies to the first year a person does not meet the work test.

Personal Tax Cuts

A three-part, seven-year personal tax plan was designed to deliver “what can be responsibly afforded while keeping the budget on track”, according to Morrison.

The tax plan included delivering immediate relief of $530 a year to the 4.4 million Australians who earn between $48,000 and $90,000.

The three parts of the tax plan included relief for low and middle-income earners; reduction of bracket creep; and ensuring more Australians pay less tax by simplifying personal taxes.

Tax threshold changes passed into law#

Tax rate (%) Current ($) 1 July 2018 ($) 1 July 2022 ($) 1 July 2024 ($)

0

0-18,200

0-18,200

0-18,200

0-18,200

19

18,201-37,000

18,201-37,000 18,201-41,000 18,201-41,000

32.5

37,001-87,000

37,001-90,000 41,001-120,000 41,001-200,000

37

87,001-180,000

90,001-180,000

120,001-180,000 (no longer exists)

45

180,001-plus

180,001-plus 180,001-plus 200,001-plus
Source: Budget Papers
# These tax rates passed through parliament in June 2018 and are now law.
 

Tax Relief for low-to-Middle Income Earners

From the 2018-19 financial year, there will be a new non-refundable tax offset for low and middle income earners. Those earning less than $37,000 will have a tax offset of $200; those between $37,000 and $48,000 will receive between $200 and $530, and those earning between $48,000 and $90,000 will receive $530.

For those on more than $90,000, the tax offset will reduce by 1.5¢ for every dollar above $90,000 until it cuts out at just over $125,000.

According to the Treasurer, for middle-income households with both parents working on average wages, “this will boost their ‘kitchen table’ budget by more than $1,000 every year”.

Because they are non-refundable tax offsets, taxpayers will only see the benefit at tax time next year when they can claim the offset to reduce their tax bill (any excess tax offset cannot be refunded).

Reduction of Bracket Creep

For the 2018-19 financial year, the income threshold for the 32.5 per cent tax bracket rises from $87,000 to $90,000. This move means that someone earning $90,000 a year enjoys a total of $665 a year tax saving from the new tax offset and increased threshold ($530 tax offset plus $135 increased threshold saving). For those earning more than $90,000, the $665 saving gradually reduces together with the diminishing tax offset.

The broadening tax bracket means that about 210,000 taxpayers who earn between $87,000 and $90,000 won’t be pushed into the 37 per cent tax bracket.

This again changes from the 2022-23 financial year when the same threshold will rise from $90,000 to $120,000. The threshold for the 19 per cent tax bracket will also rise from $37,000 to $41,000 at this time.

Aboloshing the 37 Per Cent Bracket

The Treasurer’s tax plan culminates in the 2024-25 financial year where the 37 per cent tax bracket will be abolished entirely. This will reduce the number of tax brackets from five to four. The top marginal tax rate remains at 45¢ but the threshold it applies from rises from $180,001 to $200,001. This means all Australian taxpayers who are earning between $41,000 and $200,000 annually will only pay 32.5¢ in the dollar from this time.

Older Australians

Some of the biggest changes for older Australians in years were announced in this year’s budget.

The Treasurer said the government would spend $1.6 billion over four years to create 14,000 new home-care places, aimed at helping older Australians stay at home longer rather than moving into residential aged care.

There will also be extra money for aged-care services in regional Australia and more support for mental health services in aged-care facilities.

The government also committed $11 million to expand the pensions loan scheme. The scheme involves a form of “reverse mortgage” that currently lets part-rate pensioners and people ineligible for the age pension because of the income or assets test, to borrow against their own property to top-up their entitlement, up to the maximum rate of pension. The scheme will be expanded to all pensioners (including full-rate pensioners) and anyone over age pension age, and will allow them to top-up their entitlement to up to 150 per cent of the maximum rate of pension.

Pensioners will also be able to work for longer as the government will increase the pension work bonus from $250 to $300 a fortnight.

This lets pensioners earn up to $7,800 a year without their pensions being affected. The work bonus has been expanded to apply to self-employed pensioners with the Treasurer saying “it’s never too late to start a business”.

Gayle Bryant is a freelance financial and business journalist and sub-editor based in Sydney.


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