As usual, there has been much discussion about funding cuts and increases, and funding priorities generally. Aged care got a big increase, and the ABC had another cut – and many other things happened (apparently we are getting a $26m Space Agency).
However, here we will focus on the two main ‘structural’ changes to our income tax system that were announced last night.
It is clear that the ‘big ticket’ items the Turnbull Government wanted for this Budget were the new tax offset and the future tax cuts. We will spend most of our time discussing these, and with a few notable points at the end.
The “Low and Middle Income Tax Offset” says that taxpayers earning between $48,000 to $90,000 per year, will receive a tax offset up to $530. This offset continues for people with incomes up to $125,000, though it reduces as you go. The offset will apparently go to benefit 10 million taxpayers.
It is important to remember that a tax offset only works to reduce your tax bill. This means that, if you were going to get a tax refund next year, you will receive an extra $530 with that refund. However, if you were going to owe $1,000 in additional taxes anyway, then you will only owe $470 (being reduced by the $530 offset); you won’t see any extra cash in your wallet. Of course, the economic result is the same, but we all know human nature doesn’t see it like that.
The Treasurer said that the purpose of the offset was to “reward working Australians who have seen it tough”. To this end, he mentioned it will allow people to “fill up your car six times” or pay “a quarter’s electricity bills” or buy “a new washing machine”. The idea is that an ‘average household’ will have an extra $1,000 to burn (assuming a two-income family).
It is not straightforward whether people will see the offset as ‘money in their pocket’ when it will only turn up in another year’s time, and may only reduce the ATO’s cheque they send off. In any case, the Government will hope it is remembered on Election Day.
Future tax cuts
The personal tax cuts announced by the Treasurer are significant – to the extent that they end up happening. It is worth noting today’s personal tax rates:
$0 to $18,200 = 0% (Tax Free Threshold)
$18,201 to $37,000 = 19%
$37,001 to $87,000 = 32.5%
$87,001 to $180,000 = 37%
$180,000 + = 45%
These tax rates have remained largely unchanged since the Howard Government’s last tax cuts in 2007 (with the exception of Treasurer Swan’s increase to the tax-free threshold). Tax brackets have become a talking point because they have not been changed for so long, which means many people have received effective tax hikes because of ‘bracket creep’ caused by inflation and wage increases. This, presumably, is what motivated the Turnbull Government to shake up the system.
The Seven-Year Plan
Essentially, the changes are about reducing and flattening the ‘middle class’ tax rate – i.e. the folks who are living in the 32.5% to 37% brackets.
The tax cuts are to happen in three stages (which the Government has called a “Seven-year personal income tax plan for lower, fairer and simpler taxes”):
- In 2019, the top of the 32.5% bracket will increase from $87,000 to $90,000;
- In 2023, the top of the 32.5% bracket will increase again from $90,000 to $120,000. (At this stage, the 37% bracket will have been squeezed down between $120,001 and $180,000); and
- In 2025, the 37% bracket will be abolished altogether, and the top of the 32.5% bracket will increase all the way to $200,000. In other words, in 2025 we should be looking at tax brackets like this:
$0 to $18,200 = 0% (Tax Free Threshold)
$18,201 to $37,000 = 19%
$37,001 to $200,000 = 32.5%
$200,000 + = 45%
Our thoughts on the changes
This would be a significant change, though it would also sacrifice a significant amount of tax revenue. The Treasurer’s argument seems to be that we won’t need it, because by 2025 the Budget will be back into surplus. If this is true, perhaps the change makes sense. But it seems a little premature to be spending them now.
Flattening out the ‘middle class’ tax rate could address the (at least theoretical) difficulty employees may have in deciding to advance when doing so would tip them over into the current $87,000 tax bracket.
A broader point could be that a progressive tax system (i.e. where your taxes should reflect your ability to pay) works better with more tax brackets, rather than less – though ultimately that is a value call. Either way, the changes will mean a guy on $40,000 will pay the same rate as a guy on $180,000. At some point someone is going to say that this is ‘unfair’ or ‘too generous’, and back will come a few more brackets.
So, are these future tax cuts likely to actually happen? It is always difficult to predict the outcome of Government policies when they are for future years like 2023 and 2024. However, we understand that the Australian Labor Party has broadly supported the changes. In any case, five years is an eternity in politics.
Superannuation – not much to say (which is a nice change)
It is worth mentioning that the Turnbull Government announced no significant changes to the superannuation system. This is important, because superannuation is usually an area where governments like to tinker. If you judge a budget measure on how boring it is, then this is a good one.
The few changes that were announced tend to be about regulation and administration:
- Administration and investment fees will be banned for ‘low balance’ accounts from 1 July 2019;
- Exit fees for all super funds will be banned from 1 July 2019;
- Super funds will be stopped from automatically joining young people (those under 25) up for life insurance;
- The ATO will launch a campaign to consolidate dormant super funds with active ones, which will reduce administration fees (since you will have less funds); and
- The ATO will also launch a ‘crackdown’ for employers with unpaid tax and super.
A few other notable things…
- The continuation of the $20,000 instant tax write-off for small businesses. This is only relevant because otherwise it would have expired, so it gives the Government another ‘announcable’;
- The ATO will have another ‘crackdown’ against tax evasion and the ‘black economy’, which (according to Treasury) will include an “economy‑wide cash payment limit for large cash transactions of $10,000”;
- The Research and Development (R&D) Tax Incentive will be reformed in line with a 2016 Review to clarify the definition of ‘eligible businesses’ and to offer further incentives for those with more ‘intense’ R&D funding (which we understand to mean those who devote a greater proportion of funds to R&D);
- ‘Cracking down’ on multinational companies (i.e. Google, Apple, Amazon) not paying their taxes, by implementing the Multilateral Anti-Avoidance Convention into our domestic law, and ratcheting up the thin capitalisation rules; and
- Tightening rules (in some regard) for ‘stapled structures’, which are commonly used by our largest listed groups investing in property and mining.
It will be interesting to see how the announced tax rate changes proceed. This will likely depend on the result of the next election, which commentators expect to happen this year. We shall all have to watch this space in the meantime.
If you have any questions about the Budget changes, and how they may affect your position going ahead, you can call us on 1300 654 590.