The 2016 Budget – what you need to know
Did the Government get it right?
The short answer is yes. Could it have done more? Sure, but that is always the case. But the ‘economic plan’ approach taken in the Budget is a positive step.
To determine whether it ‘got it right’, you need to consider the landscape. Governments across the globe are struggling to lift economic growth. Australia is doing well with annual growth at 3 per cent, but the difficult transition from mining to housing is still occurring. Inflation is low. Ratings agencies are carefully watching our progress on reducing deficits and debts. Then there is the longer-term imperative of the ageing of the workforce and the challenge that this confers in higher spending and lower revenue.
And then there is the small matter of an upcoming election. Budgets are economic as well as political documents. We are realists – we know that governments have to weigh up ‘good economics’ with good ‘politics’.
Each budget has its catch-cry or theme. In 2014 it was all about “Budget emergency” and “End of the age of entitlement.” In 2015 the catch-phrase was more positive with the budget seeking to “help Australians to have a go”. This year the theme is “jobs and growth” which is entirely appropriate.
The government is focused on measures that will support both economic growth and employment, and thus provide assistance to the Reserve Bank which has shouldered the “heavy lifting” role with monetary policy.
So the government has elected to spend more on infrastructure. Taxes have been cut to small and medium-sized enterprises (SME) (“the hope of the team”). The definition of small business has been widened. The assets write-off for SME has been extended. And the government has lifted the 38 per cent income tax threshold from $80,000 to $87,000.
The proposed infrastructure projects are spread across Australia and support a raft of individuals and industries. So the spending – like that on schools in the global financial crisis – has potential to lift a lot of boats at once.
As the Treasurer says, SME are the lifeblood of the economy. Over 97 per cent of SME employ fewer than 20 people so the sector is crucial for job creation.
And the measures to address “bracket creep” will affect over 2.5 million workers and prevent almost 500,000 people from moving into the second highest tax bracket each year. The measure is important in efforts to keep people in the workforce and encourage more people to find jobs. The tax change complements the other measures designed to attract and retain more women in paid work.
In many ways the budget is a transitional document. An election has to be held this year – if not July, later in the year – and the incoming Government has to secure agreement from Parliament on a new tax structure. Hopefully the Senate voting reforms can result in structure more amenable on making decisions for the good of all Australians.
The aim of the economic plan to address short and longer-term challenges. It is important that there are additional measures to sustain economic momentum, confidence and employment.
The longer-term goal of the Government is the same as it has been for some time – pushing ahead with the PPP policy to combat the challenges of an ageing population. PPP is increased labour market participation, increased productivity, and increased population growth. It is an under-stated policy, but has characterised budget policy for a decade.
Changes to prevent more people moving into higher tax brackets (“bracket creep”) work to attract and retain people in the workforce. Measures focussed on improving infrastructure – especially in cities – are also seen as employment friendly.
Who are the winners? (source: Budget Papers, AAP)
- Company tax cut to 27.5 per cent for all small companies with annual turnover of up to $10 million from July 1, 2016. Over next decade lower tax rate extended to all companies and then progressively reduced for all to 25 per cent by July 1, 2026.
- Small business tax concessions extended including depreciation pooling provisions, simplified trading stock rules and pay as you go instalment payments options.
- Australian Taxation Office – Gets $679 million for a new task force to ensure multinationals, private companies and the super-rich pay the right amount of tax.
Wage earners and families:
- Those earning more than $80,000 get a modest tax cut, through increasing second-highest tax bracket threshold of 32.5 per cent from $80,000 to $87,000. Prevents 500,000 taxpayers being pushed into the 37 per cent tax bracket.
- Working mums, low-income earners. Partners encouraged to top up low-income spouses’ superannuation through extended eligibility to claim tax offset for contributions; allowing women and carers whose work has been interrupted to make catch-up super contributions.
Young job seekers:
- Interns to get $200 a fortnight and their host employer to get $1000 per placement.
- Skills program to help young people under 25 get into the workforce.
- Wage subsidy gives employers $6,500 and $10,000 for taking on young job seekers.
- $50 billion infrastructure spend on roads and rail, including Sydney and Melbourne metros and inland rail.
- $2 billion water program to invest in new dams and pipelines across Australia.
Teachers and students:
- Additional $1.2 billion between 2018-2020 for schools contingent on better education outcomes.
- $2.9 billion more for public hospital services plus new money for essential dental services for children and low income adults.
- 20-year defence plan, new high-tech jobs including 3,600 jobs in naval ship building.
Who are the losers? (Source: Budget Papers, AAP)
High end superannuation users and high income earners
- New $1.6 million cap on amount of super that can be transferred tax-free into retirement phase; 30 per cent tax on concessional super contributions extended to those earning over $250,000; annual concessional contribution caps cut to $25,000 for all; lifetime cap on $500,000 on all non-concessional contributions.
Anyone earning less than $80,000:
- No tax cut for anyone earning less than $80,000.
- New ATO taskforce to crackdown on tax avoidance and raise $3.7 billion by 2020.
- Four annual 12.5 per cent increases in tobacco excise to lift price of packet of cigarettes to about $40 by 2021.
Buying goods online:
- 10 per cent GST levy on low-value goods imported by consumers.
- Tightening of welfare safety net to get those at risk of long-term dependency into employment.
Taxing & Spending
What is included in the budget? (Quotes taken largely in full from Budget papers)
Jobs and growth – Small Business
- From 1 July this year, the small business tax rate will be lowered to 27.5 per cent and the turnover threshold for small businesses able to access it will be increased from $2 million to $10 million. This means businesses with a turnover of less than $10 million will also be able to access other tax incentives, including the small business depreciation pooling provisions, simplified trading stock rules, and Pay-As-You-Go Instalments payments option.
- This will mean 870,000 businesses, employing 3.4 million Australians, will have their tax rate reduced, including a 2.5 percentage point cut in the tax rate for up to 60,000 businesses with a turnover between $2 million and $10 million, employing around 1.5 million Australians.
- Increase the unincorporated small business tax discount to 8 per cent and extend the threshold from a turnover of $2 million to less than $5 million.
Jobs and growth – Infrastructure
- Roll out our $50 billion national infrastructure plan to support economic growth including $857 million for the Melbourne Metro rail project, $1.7 billion for the Sydney metro project and a new infrastructure body to encourage private sector infrastructure investment.
- Providing $594 million in additional equity to the Australian Rail Track Corporation for land acquisition and the continuation of pre-construction works and due diligence activities.
- The Government will also establish a $2 billion Water Infrastructure Loan Facility which will catalyse new investment in dams and pipelines across Australia, building on the existing National Water Infrastructure Development Fund and the Northern Australia Infrastructure Facility.
- The Government has finalised or committed to agreements with four states and territories under the Government’s Asset Recycling Initiative, worth $3.3 billion, which will catalyse $23 billion in additional infrastructure investment in projects including the Sydney and Melbourne Metro projects, light rail in Parramatta, regional road and rail freight corridors across NSW and Victoria, and flood mitigation works in the Northern Territory.
Increase the upper limit for the middle income tax bracket
- From 1 July this year, an increase in the upper limit for the middle income tax bracket from $80,000 to $87,000 per year. Those earning average wages – full-time or otherwise – should stay in the middle income tax bracket. This will stop around 500,000 taxpayers from facing the 37 per cent second top marginal tax rate in each and every year.
- No removal or limit on negative gearing. Those earning less than $80,000 a year in taxable income make up two thirds of those who use negative gearing.
- Providing additional funding to the State and Territory Governments for public hospitals by retaining key features of Activity Based Funding, including the National Efficient Price, which is expected to increase payments by up to $2.9 billion over the three years to 2019-20. Growth in the Government’s contribution will be capped at 6.5 per cent a year over this period.
- Funding support for government and non-government schools for the 2018 to 2020 school years, which is expected to increase payments by $928 million over the three years to 2019-20. Total school funding will be indexed by an education sector specific index of 3.56 per cent, with an allowance for changes in enrolments.
Multinational & tax
- Establishing a new Tax Avoidance Taskforce as part of the ten year enterprise tax plan, which is expected to increase cash payments by $49 million in 2016-17 and $679 million over the four years to 2019-20. This measure will enhance the Australian Taxation Office’s audit and compliance activities targeting multinationals, large corporations and high wealth individuals. These changes are expected to increase receipts by $2.2 billion over the forward estimates period.
- Continuing Australia’s military contribution to the international effort to disrupt and degrade Daesh (or ISIL) in Iraq and Syria, which is expected to increase payments by $345 million in 2016-17 and $373 million over the three years to 2018-19.
Higher education and Youth
- Delaying the implementation of the higher education reforms announced in the 2014-15 Budget and the 2014-15 MYEFO by an additional year to undertake further consultation, which is expected to increase payments by $327 million in 2016-17 and $573 million over five years to 2019-20.
- Improving youth employment outcomes through the establishment of a Youth Jobs PaTH program for young job seekers aged under 25 years, which is expected to increase payments by $12 million in 2016-17 and $249 million over the five years to 2019-20.
Superannuation tax concessions
- Reduction in access to superannuation tax concessions for the most wealthy effective from July 1 2017. Introducing a transfer balance cap of $1.6 million on amounts moving into the tax-free retirement phase, with balances able to increase above this cap, on account of tax free earnings, once transferred; extending the 30 per cent tax on concessional contributions to those earning over $250,000; reducing the annual cap on concessional superannuation contributions to $25,000; and from tonight, establishing a lifetime non-concessional contributions cap of $500,000.
- A balance of $1.6 million can support an income stream in retirement around four times the level of the single Age Pension. The transfer balance cap will be applied to both current retirees and to individuals yet to enter their retirement phase.
- The transfer balance cap, lifetime non-concessional cap and the 30 per cent contributions tax for those on high incomes will each affect less than one per cent of superannuation fund members.
- A concessional contributions cap of $25,000 per annum will affect just three per cent of superannuation fund members, particularly those who pay the top rate of income tax.
- Commensurate measures will also be applied to high income earners with defined benefit arrangements, including current and former politicians and public servants.
All new spending measures have been offset by savings in payments, not by policy increases to tax revenue. The overall impact of new policy decisions on payments in this Budget is an improvement to the bottom line of $2.4 billion over the five years to 2019-20, with all increases in expenditure offset by savings in payments. Since the 2015-16 MYEFO, total payments for 2016-17 have decreased by $233 million.
Published: Wednesday, May 04, 2016