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Federal budget 2018: tax and super reforms

9 May 2018

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

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There were a few surprises in the federal government’s 2018 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% p.a.
  • 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 ATO. 
  • Young people, or those with 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.

 

Introduced as part of the government’s “Protecting your super” package, the ban on exit fees will apply from July 1, 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. Also, a new requirement will be introduced requiring inactive super accounts with balances less than $6,000 to be transferred to the ATO.

From July 1, 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, Association of Superannuation Funds of Australia chief executive officer, Martin Fahy, warned that “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 July 1, 2019, those aged 65 to 74 with a total super balance below $300,000, may rely on an exemption to the work test for voluntary contributions to superannuation.  This exemption applies to the first year a person does not meet the work test. 

2018-2019 Federal Budget at a glance:  Click to view (infographic)   

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

Proposed tax threshold changes

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

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 on between $37,000 and $48,000 will receive between $300 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 cents 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 $1000 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 p.a. enjoys a total if $665 a year tax saving from the new tax offset and increased threshold ($530 tax offest plus $135 increased threshold saving). For those earning more than $90,000, the $665 saving gradually reduced 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 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. 

Abolishing 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 cents 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 p.a. will only pay 32.5 per cent 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. In particular, 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 lets pensioners borrow against their own property. Pensioners will now be allowed to borrow an amount that is up to 150 per cent of the pension. This differs from the previous ruling where the amount was capped at the pension value.

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”.

And in other areas, while the Medicare levy was initially going to be raised to 2.5 per cent from the 2019-20 financial year, it will now remain at 2 per cent.