2014/15 Budget Summary

2014 Budget Summary

Superfund Partners Director and wordsmith Mark Beveridge has distilled the government spin doctoring down into a few pages of need to know information.  It doesn’t cover every dollar saved or spent, but it will help answer your most common questions.

Taxation

The government claim is that it will collect less in tax than would have been the case if Labor was re-elected. Here are a few of the changes.
Temporary Budget Repair Levy (TPBR) New 2% levy on income over $180,000 starting from 1 July 2014, ending 30 June 2017. You will be $400 worse off if you are earning $200,000 and $2400 worse off if you earn $300,000.

Company tax. Down to 28.5% but no date given, and not fully costed. This one could be pushed back and might depend on the Paid Parental Leave Scheme politics.
Paid Parental Leave Scheme. The 1.5% levy on profits of businesses with turnover above $5m will not give rise to a franking credit, so these businesses should be cashflow neutral, but shareholders will get a lesser tax credit and will be slightly worse off.
Fuel excise indexation. The current excise is 38.14 cents per litre. It has been frozen at the level since 2004. Assuming a CPI rate of 2.5%, the indexation of the excise is likely to add 1.25 cents to the price of a litre of fuel over the next year. Annoying and unfair, but doubtful that it will change anyone’s driving habits. Money collected is to be spent on roads.
Sick tax. The introduction of a $7 Medicare co-payment on GP visits, out-of-hospital pathology and medical imaging will apply from 1 July 2015. From this payment, $2 goes to the service provider, while $5 goes into the Medical Research Future Fund. For people on concession cards, and children under 16, the co-payment will only apply to the first 10 visits in a calendar year. In addition PBS medicine costs will also increase.

Business

Company tax rate will be cut to 28.5%. If it happens it will result in changes to franking accounts, similar to when rates fell from 39% to 33% then to 30%.
Advice from your accountant about how to get the most out of your company franking account will likely be on the agenda for end of year tax planning.
Bonus for employing ‘older unemployed Australians’: Take on an employee over 50, who has been on income support for at least six months, and you will get a $3,000 payment after six months; another $3,000 after 12 months; $2,000 after a year and a half, and then $2,000 after two years. Part timers working at least 12 hours per week will also attract the bonus on a pro-rata basis.
Research and Development tax incentives to be reduced.
Super Guarantee: Payments to increase to 9.5% in the 2014/15 tax year. After this they will be frozen at that level until 30 June 2018, and from there will increase at 0.5% per annum till they reach 12% in 2022/23.

Superannuation

Can you believe that there were no major changes to taxation, preservation ages, or income streams! There was an announcement that goes to the heart of common sense, and that was regarding the ability of superfunds to refund excess non-concessional contributions (NCC’s) made after 1 July 2013 that exceed the cap. Taxpayers can withdraw the excess NCCs and any associated earnings from their superannuation fund. Earnings withdrawn from the fund will be taxed at the taxpayer’s marginal tax rate.
Compulsory super contributions will increase from 9.25% of salary to 9.50%.
Indexation of contributions caps remains unchanged. Standard concessional caps to be $30,000 from 1 July 2014, while non-concessional cap will be $180,000. Bringing forward the next two years NCC’s means you can do a $540,000 contribution. (Please don’t do this without professional guidance)

Age Pensions

It was well known before the Budget night speech that age pension eligibility will increase to 70 by 2035.  People born before 1 July 1958 will not be affected by this change.
From Sept 2017 increases in pensions and benefits will be linked back to inflation, not rises in the average weekly earnings.  This is likely to trim pension increases by around 1% to 2% per annum.
Asset and Income test thresholds will continue to be indexed until September 2017, but will then have a three year freeze. If this is as bad as it gets in terms of changes to thresholds, then the outcome is a lot better than many had feared.
Centrelink financial asset deeming thresholds will reduce to $30,000 for singles (down from $46,600) and $50,000 for couples (on from $77,400) from 20 September 2017. This measure, along with the changes to assessment of allocated pensions, will make pre- 1 January 2015 allocated pensions more valuable.
Untaxed super income will now be included in the income test for the Commonwealth Seniors Health Card (CSHC) from 1 January 2015.
The assessment of superannuation income when testing for eligibility for the CSHC will be the same as for Age Pension recipients. This will align with the 2013-14 Budget measure to deem the balances of account-based superannuation of pensioners from 1 January 2015. All superannuation account-based income streams held by CSHC holders before the 1 January 2015 will be grandfathered under the existing rules.
In other CSHC news, the old income thresholds of $50,000 for singles and $80,000 for couples, are to be indexed from September 2014.
The Seniors Supplement will no longer be payable for holders of the CSHC from 20 September 2014.
The Government will abolish the Dependent Spouse Tax Offset for all taxpayers from 1 July 2014.
The Mature Age Worker Tax Offset (MAWTO) is also gone from 1 July 2014.
DFRB and DFRDB superannuation scheme members aged 55 and over will have their superannuation benefits indexed by the higher of CPI and the Pensioner and Beneficiary Living Cost Index, with reference also to a benchmark level of Male Total Average Weekly Earnings.

Medicare and Family Tax Benefits

The Medicare levy low-income threshold will increase for families from the 2013-14 income year. The threshold for couples with no children will be increased to $34,367, and the additional amount of threshold for each dependent child or student will be increased to $3,156.
Family Tax Benefit part A and B will be frozen for two years saving $8b out of family welfare payments. The income threshold to go down to $100K for eligibility to FTB part B, and will cease after the youngest child turns six.
Low income single parents will receive new assistance of $750 per annum for each child aged between 6 and 12.
Paid Parental Leave scheme is to be capped at $100,000 inclusive of super.

Young people

Joe reckons that ‘work helps build a sense of community’. Young people under 30 will be subject to new ‘earn or learn’ programs. Under 25’s will get Youth Allowance payments rather than the higher rate of NewStart.
Government funding for tertiary education used to be just the domain of university students, but now the expenses of diplomas, advanced diplomas and associate degree courses will also be eligible for HELP loans.  However the price of education will likely rise!
University fees will be unregulated from 1 January 2016. The government thinks that some courses could cost less. This is unlikely. HELP debts will have to be repaid once the recipient is earning $50,623, and the cost of this debt is to rise from CPI, to an amount equal to the government cost of funding, but capped at 6% per annum. Twenty percent of the higher university fees will be funnelled back into a Commonwealth Scholarship program to benefit students with merit and need.
The Government will abolish the First Home Saver Accounts. New accounts opened from Budget night will not be eligible for concessions, with the Government co-contribution to cease from 1 July 2014. Although they were a good idea, the uptake was minimal.

Investment Markets

Pre-budget Government projections implied that we would hit total debt of $667Bn by 2024 if spending was not reigned in. The IMF had warned that our rate of debt growth was the third fastest of the advanced economies, even though as a percentage of GDP the total remains modest.
At the same time, other economic authorities have warned Australia not to step on the fiscal brake pedal too hard just for the sake of returning to a surplus in the short term. As a result of those competing interests, this budget was one where we were all set up for some horrible news, and yet the actual outcome was far less aggressive.
It will be interesting to see if the fiscal conservatism and plans to reduce the deficit to a mere $2.8b in 2017/18 will see any reduction in the ten year bond rates.  If markets are concerned that the fiscal constraint is too much, then lower rates should be the result, as growth would be compromised. One can’t help but be a little amused by the irony of the fact that our ten year government bond yield is at 3.84% when our debt is sitting at 20% of GDP, while places like Spain and Italy now enjoy yields below 3.00%.
If Grease was the word in 1978, ‘infrastructure’ is the word in 2014 that will grease the gears of the economy, taking over where the mining boom left off. Joe Hockey proudly told us that the planned infrastructure spend will be equal to eight Snowy Mountain schemes in the next decade. Spending on new road, rail and airports will reach $50b by end of decade. Most of that was already committed, and the 2014 budget added another $11.6b. However, with a bit of ‘multiplier effect’ the proclamation is that infrastructure spending by federal and state governments, plus private enterprise will hit $125b, to provide a boost of 1% to GDP.  This ought to provide a fillip to engineering firms.
Oh, in case you forgot, we were also reminded of the $550 per annum per family saving on carbon tax next year. That would only partially offset any crimp to retail spending that results from the Budget Repair Levy and cuts to welfare.
Grants to the states for hospitals and schools will be brought back into a sustainable trend.  Current funding for schools is around $12b a year, and was forecast to reach $30b ten years from now, will be reined in to be only $25b in 2024. Hospital funding which was forecast to go from$13b last year to $40b in 2024 will come down to $25b. The political expectation is that this will lead to the states pushing the Federal government for a GST increase to fund the state based spending programs. This might be a negative for state government bonds, but could also create a buying opportunity.
Medical Research Future Fund is the new name for the proposed $20b Medical research fund, which when fully funded will be the largest of its kind in the world. The promise is that $5 out of every $7 of the GP visit co-payment scheme will go into this fund.  The income (not capital) from the fund will be used to fund approximately $1b per annum to the National Health and Medical Research Council. The fund is designed to be a permanent endowment for medical research.
Large industry will be a loser from cuts to assistance programs in manufacturing. Instead, the plan is to spend a little under $1b on assisting exporters, innovators and entrepreneurs.

Conclusions

Chris Richardson from Access Economics reckons it is not such a tough budget and is a fair balance. He thinks it is a solid start on what needs to be done to keep us on track, and last night described himself as a happy economist.

On balance we would expect this slightly negative budget to create a small fiscal drag.  What that may produce is a delay in any interest rate increases, and therefore lower interest rates will also do some of the heavy lifting that Hockey assumed would be done by humans.  We will wait and see!

About Mark Beveridge

Mark is a director of Superfund Partners and Quill Group Financial Planning and has over 20 years experience in the financial planning industry including operating his own financial planning practice before joining the Quill Group in 2007.

Mark’s qualifications include a Graduate Diploma of Financial Planning, Diploma of Financial Markets, Financial Services Institute of Australia (Fellow).

Mark is also a SMSF Specialist Advisor accredited through SPAA.

Mark works from our Eight Mile Plains office and can be contacted on 07 3423 3700 or via email mark.beveridge@superfundpartners.com.au

Director at Superfund Partners. I love working in the SMSF space. Self-managed super funds are more than just a savings vehicle - they enable people to truly take control of their financial situation which is key to achieving happiness. Leading the Superfund Partners team is a privilege - they are a great crew and they always put others first.