Federal Budget 2015-2016 – The ‘Have a Go’ Budget

Overview

Budget 2015 is about fairness, families and small business, with a smiling Treasurer encouraging Australia to ‘get out there and have a go’.

In describing his second Federal Budget the Federal Treasurer, Joe Hockey said ‘This Budget is measured, fair and responsible’ and is designed to promote ‘jobs, growth and opportunity’.

The Federal Budget speech delivered an upbeat outlook for Australia’s economic future and confirmed a number of measures that had been announced pre-Budget.

For the second year running no new taxes on superannuation were introduced, however some changes have been made to the Age Pension. These measures will increase the number of people eligible for a full Age Pension but reduce the level of assets at which a part Age Pension is received.

A number of measures were introduced to encourage growth in small business, including a reduction in the company tax rate to 28.5% for small business, and an immediate tax deduction for items valued less than $20,000.

Social security measures primarily deliver a range of changes for families including the introduction of a single child care subsidy which is means tested. This long-awaited child care reform will simplify access to child care with a focus on lower and middle income families, as well as families with disadvantaged children.

In addition to these changes, the Government abandoned the changes to the indexing of the Age Pension and the resetting of the deeming thresholds.

A number of personal income tax measures aim to modernise taxation methods including changes to the tax deduction of car expenses, caps on fringe benefits and subjecting GST to offshore digital services, like Netflix, provided to Australian consumers.

However, big ticket tax reform measures remain for consideration in the Tax Reform White Paper and pre-Budget speculation that a new 0.05% tax would apply to bank deposits of up to $250,000 was not included in the Budget measures.

The key issues of the budget and how they may affect you are detailed below.

Important Note: Before any of these announcements can be implemented, they will require passage of legislation, which will remain challenging.

Age Pension & Disability Support Pension

Increase in Assets Test thresholds

From 1 January 2017, the Assets Test thresholds for the full pension will be increased. The current and proposed thresholds are detailed below:

Increasing of the Assets Test taper rate

From 1 January 2017, the Assets Test taper rate will increase from $1.50 to $3.00, effectively reversing the 2007 decision to halve the taper rate at that time. The current and proposed thresholds are detailed below:

Comment:

Pensioners who lose their pension entitlement on 1 January 2017 as a result of these changes will automatically be issued with a Commonwealth Seniors Health Card or a Health Care Card (for those under Age Pension age).

Impact of increase in Assets Test thresholds and taper rates on pensioners

• The proposed new taper rates and Assets Test thresholds mean some pensioners will receive a higher fortnightly pension, while others will see their pension reduced. The following table approximates the level of assets above which the pension (under the Assets Test) will reduce due to the proposed measures compared to current entitlements.

Aged Care

Rental Income Exemption Removed

The rental income exemption under the aged care means test, for aged care residents who are renting out their former home and paying their aged care accommodation costs by periodic payment, will no longer apply. This applies to new residents entering aged care from 1 January 2016.

Personal Income Tax

Increase to Medicare Levy Low-Income Threshold

The Government will increase the Medicare levy low-income threshold for families from the 2014-15 financial year. The threshold for couples with no children will be increased to $35,261 per annum and the additional amount of threshold for each dependent child or student will be increased to $3,238 per annum.

The increase in these thresholds takes into account movements in CPI. There will also be an increase to the annual Medicare Levy low-income thresholds for individuals ($20,896) and pensioners ($33,044).

Changes to claiming a tax deduction for car expenses

The Government will modernise the methods of calculating work-related car expenses from the 2015-16 financial year. In doing so the ‘12% of original value method’ and the ‘one third of actual expenses method’, will be removed. The cents-per-kilometre rate will be modernised by replacing the three current rates based on engine size with a single rate of 66 cents per kilometre. In addition they will retain the ‘logbook method’ of calculating expenses. The Government has indicated this will not impact leasing and salary sacrifice arrangements.

Small Business Taxation

Tax Cuts for Small Business

From the 2015-16 financial year, the Government will reduce the company tax rate to 28.5% for companies with aggregated annual turnover less than $2 million. Companies with an aggregated annual turnover of $2 million or above will continue to be subject to the current 30% rate on all their taxable income.

The current maximum franking credit rate for a distribution will remain unchanged at 30% for all companies, maintaining the existing arrangements for investors, such as self-funded retirees.

Individual taxpayers with business income from an unincorporated business that has an aggregated annual turnover of less than $2 million will be eligible for a small business tax discount. The discount will be 5% of the income tax payable on the business income received from an unincorporated small business entity. The discount will be capped at $1,000 per individual for each income year, and delivered as a tax offset.

Comment: This lowering of the tax rate was an expected measure to encourage small business investment in difficult economic times. The Government hopes that the difference between the tax rates is great enough to benefit small business but also low enough to incentivise small businesses to grow. It is interesting that the Government has left the franking credit rate at 30% for all companies, allowing small business owners to maintain the higher level of tax advantages associated with franked dividends.

Immediate tax deduction for items valued less than $20,000

Small businesses with aggregate annual turnover of less than $2 million can immediately deduct assets they start to use or install ready for use, provided the asset costs less than $20,000. This will apply for each asset acquired and installed ready for use between 7.30pm (AEST) 12 May 2015 and 30 June 2017. Assets valued at $20,000 or more (which cannot be immediately deducted) can continue to be placed in the small business simplified depreciation pool (the pool) and depreciated at 15% in the first income year and 30% each income year thereafter. The pool can also be immediately deducted if the balance is less than $20,000 over this period (including existing pools).

The Government will also suspend the current ‘lock out’ laws for the simplified depreciation rules (these prevent small businesses from re-entering the simplified depreciation regime for five years if they opt out) until 30 June 2017.

From 1 July 2017, the thresholds for the immediate depreciation of assets and the value of the pool will revert back to existing arrangements.

Social Security

Cessation of the Low Income Supplement

From 1 July 2017, the Government will cease payment of the Low Income Supplement. Currently a Low Income Supplement of $300 per year is paid to people whose income was below certain thresholds and who did not receive a pension or benefit from the Australian Government for more than 39 weeks in the previous financial year.

Increase in Pharmaceutical Benefits Scheme safety net threshold

The Government will extend the increase to the Pharmaceutical Benefits Scheme (PBS) safety net thresholds by one additional year in 2019. This builds on the 2014-15 Budget measure to increase the PBS safety net thresholds for four years from 1 January 2015.

Removing double-dipping from Paid Parental Leave

From 1 July 2016, the Government will remove the ability for individuals to take Parental Leave Pay (PLP) from the Government in addition to any employer-provided parental leave entitlements. Currently individuals can double dip, by taking payments from both the Government and their employer.

The Government will ensure that all primary carers would have access to parental leave payments that are at least equal to the maximum PLP benefit (currently 18 weeks at the national minimum wage).

Introduction of a single Child Care Subsidy (CCS)

From 1 July 2017, the Government will replace the Child Care Benefit, Child Care Rebate and the Jobs, Education and Training Child Care Fee Assistance programs with a new, single, means-tested Child Care Subsidy (CCS).

Families meeting the activity test with annual incomes up to $60,000 will be eligible for a subsidy of 85% of the actual fee paid up to an hourly fee cap. The subsidy will taper to 50% for eligible families with annual incomes of $165,000.

The hourly fee cap in 2017-18 will be set at $11.55 for long day care, $10.70 for family day care, $10.10 for outside school hours care and $7.00 for a nanny in a child’s home (pilot program from 1 January 2016). The hourly caps will be indexed by CPI.

Eligibility will be linked to a new activity test to better align receipt of the subsidy with hours of work, study, or other recognised activities.

The CCS will have no annual cap for families with annual incomes below $180,000. For families with annual incomes of $180,000 and above the CCS will be capped at $10,000 per child per year.

The income threshold for the maximum subsidy will be indexed by CPI with other income thresholds aligned accordingly.