2016 Federal Budget

During the last 12 months we said goodbye to arguably Australia's worst Treasurer, Joe Hockey, and said hello to interim treasurer, Scott Morrison.

This Budget has been prepared in light of the knowledge that the prime minister, Malcolm Turnbull, will be visiting the Governor-General in the next few days to call a double dissolution election. Given the small window of opportunity available to actually have these measures passed in the two houses of Parliament, this Budget can only be seen as a pitch by the Liberal/National coalition to win the upcoming election.

Having said that, listening to the Shadow Treasurer, Chris Bowen, some of these changes will be supported by the Labor Party.

Now, for the most part, the Budget does nothing to reverse the savage cuts announced in the previous Budgets for Health, Education, Social Security, the Arts, etc.

The Budget also avoids all of the various thought bubbles, floated and then popped, in the last few months. So no changes to GST rates or negative gearing. No significant changes to income tax rates for most people either.

Yes, tax on tobacco will rise significantly for those of you who still smoke (apparently only 13% of the population still do).

As economic managers, the Liberal/National coalition have smashed the myth that they are any better in managing the economy that the Labor Party. They are not (For some pretty good analysis of that, read Tim Dunlop, or Stephen Koukoulas or a whole bunch of others). The Budget stays in deficit for the foreseeable future and we remain a fairly highly taxed nation.

So, on to the announcements. What changes are being proposed?

Small Business Taxation

As per last year some of the biggest announcements are for small businesses.

One of the most surprising is the redefinition of small business. At the moment it is defined by gross revenue and if that is under $2 million you are a small business.

From 1 July 2016 that threshold will increase to $10 million. That's a big jump.

Small businesses will have a number of things going for them:

• A reduction in the company tax rate from 30% to 27.5% in 2017
• A 1 year increase of the measure announced last year to claim as an income tax deduction items of plant and equipment costing under $20,000
• Unincorporated small business (sole traders and partnerships) will get an 8% discount on the tax paid on those profits (though only to a maximum of $1,000 - as per the last Budget)

A word of caution on these company tax cuts. It appears as though whilst the company will be paying less tax the franking credits on the profit distributions will be less, which negates the benefit to most small business owners operating in a company structure. Hopefully this will be clarified when/if the legislation is debated.

Personal Taxation

Those of you earning over $80,000 per annum are in line for an effective tax cut of about $6 per week as the 32.5% tax threshold rises from $80,000 to $87,000 from 1st July 2016.

Superannuation

I'm going to ignore a lot of the changes announced as they are for very high earners with a lot of money in super. If this describes you, you really need to be paying for an adviser to let you know how these changes will affect you, rather than getting free advice from my blog.

There were some other interesting announcements in the area of super that could be of interest to some people:

• From 1st July 2017 everyone up until the age of 74 will be able to claim a tax deduction for superannuation contributions made personally.
• A low income superannuation tax offset will be introduced for low income earners from 1st July 2017, worth up to $500 per year.
• People on Transition to Retirement pensions, there will be changes to the way your super fund earnings are taxed, also from 1st July 2017.

GST

The Government will attempt to make people pay for GST on all overseas transaction by having overseas businesses register for GST if they sell more than $75,000 worth of goods to Australians per year. Good luck with policing that.

Tobacco Excise

Stop smoking if you want to have enough money to eat.

Public Sector Efficiency

For those of you that need to deal with the Government on a regular basis (including BAS and Centrelink) there will be a big push to get people to deal with the Government electronically. This will mean electronic BAS, and hours spent trying to get the myGov website to actually work. This is all so that the government can employ less people to deal with this stuff. Happy days ahead if/when their systems crash.

My Reaction

Bring on the election.



Want to remind yourself of the horrors of the last 2 budgets? Read my reviews of the 2014 and 2015 Budgets.

2015 Federal Budget

I mentioned in my review of last year's budget that Joe Hockey is not the nation's greatest orator. This hasn't changed.

What has changed, however, was the tone of the budget.

Last year, the Treasurer announced a Budget that threatened cuts to core services, changes to the way education and health services were to be charged, and shook the confidence of the Australian economy.

I say threatened, because the Government severely misjudged the mood of the Senate, and much of the more significant legislative changes were never passed. Think of the reforms to the charging of Higher Education fees, or the GP co-payments, or the pensioner benefits. Also, the over-the-top parental payment scheme concocted by the Prime Minister. That was watered down and then quietly shelved as the Senate blocked that as well.

All of these proposed measures were to counter the supposed Budget emergency that the Government had been going on and on (and on and on and on) about for the last couple of years.

Since the last Federal Budget the unemployment rate has gone up, tax revenues have fallen, the Budget deficit has increased and the country has only enjoyed a very modest rate of economic growth.

So, what is the message from tonight's Budget? Apparently the Budget emergency has gone. It's all about spending tonight. Spending to a select few, anyway.

Why has there been a full reversal in the message by the Government over the last 12 months?

Part of it is political. The Senate is still hostile to the Government and wont deal with any more nasty surprises, like last year's Budget.

I think part of it is that the Liberal Party has lost so much credibility with the voters in the last Budget that it was looking like a one term Government. A lot of the new spending initiatives here is to shore up its voter base in preparation for the next Federal Election.

I think a part of it is that Joe Hockey was made to look like a total fool after the last Budget and he needed to pull a rabbit out of the hat in order to ensure he stayed on as Treasurer leading into the next election. I think he has almost achieved this.

So, what are the big announcements (and the smaller ones that didn't get air time)?

Small Business Taxation

• The key measure announced was an upfront claim by Small Businesses on all plant and equipment purchased up to $20,000. This is available for any purchases from tonight, and over the next two years (I assume this means up until 30th June 2017). In this instance a Small Business means a business with turnover of less than $2 million per year. Any existing Depreciation Pool with a balance of less than $20,000 will also be allowed to be written off in the year it occurs.
• From 1 July 2015 the company tax rate for Small Business will be reduced from 30% to 28.5%. Importantly, the franking rebate will remain at 30%.
• For unincorporated Small Businesses, the rebate is much more modest and will top out at $1,000 per annum. This is almost going back the small business rebate from a couple of years ago, but with a much more generous turnover threshold ($2 million v $75,000). For a lot of Small Businesses that operate under trust structures, it is unclear as to how this rebate will actually work. Stay tuned for the fine details on this.
• From 1st July 2015 all legal and other establishments costs for setting up a new Small Business will be tax deductible, rather that written off over 5 years.
• From 1st July 2016, Small Business will not have to worry about capital gains tax when looking to change structures. A note of warning here. This area of tax law is pretty messy, and I am not expecting this to improved in any substantial way. I'll await the details before commenting further.
• For primary producers, there will be significant changes to the way purchases for fencing, fodder storage and water facilities (dams, water tanks etc), from 1st July 2016.
• From 1st April 2016 the rules relating to fringe benefits and electronic mobile devices will be relaxed. Currently the exemption effectively only applies to one mobile device per person,

Personal Taxation

• If you are an employee of a non-for-profit (including hospitals) and you have been able to salary package you meals and entertainment you are going to be in a rude shock. The threshold for this will reduce to $5,000 from 1st April 2016 (down from $31,177 for not-for-profit employees and $17,667 for hospital employees). 
• Motor Vehicle deductions for employees will be simplified from 1st July 2015. And by simplified, I mean reduced. Currently there are four different methods for calculating motor vehicle tax deduction. Two of these (the 12% of cost rule and the 1/3 of actual costs rule) will be abolished. The cents per kilometre rate will be reduced to one rate only of 66 cents per kilometre. Bear in mind that in 2014 tax returns the rates were as high as 77 cents per kilometre. The log book method will still be able to be used.
•  There will be the removal of zone rebates for those workers who fly in-fly out in remote areas of Australia.

Other Areas

• There have been some significant changes announced in the Budget for the way the Child Care benefits will be calculated. I wont cover this here as a) the new measures wont kick in for a few years and b) I don't think it is likely the Senate will pass them.
• There has also been an announcement of the removal of "double dipping' by parents able to access the Parental Leave Pay Scheme. Whilst the government is hoping of significant tax savings here I also think this will have difficulty in passing the Senate.
• $131 million has been provided to the tax office to improve their digital services. A lot of this is to improve their MyTax site, allowing taxpayers to lodge tax returns online without needing to go through tax agents. (Theoretically.)
• From 1st July 2017, offshore suppliers of services to Australians (such as Netflix) will be required to charge GST on their services. I am not entirely sure how this will be implemented.
• The Treasurer has indicated that superannuation laws will not be changed during the term of this current government. After the next election, all bets are off.

My Reaction

If you ignore the political rhetoric and attempted point scoring by this Treasurer and the Government, it's difficult to know what economic rationale there is for having such two different Budgets from 2014 and 2015. Tax breaks are always welcome, and no small business owner will ever knock back the opportunity to reduce the amount of tax they are required to pay. Having said all that, I don't think this Budget really will achieve anything economically for the country, nor will it do anything for the Government other than to sure up its political base.

2014 Federal Budget

What can you say?

Every once in a while a Federal Budget is delivered that makes the country gasp at the sheer audacity of it. This is that Budget.

Joe Hockey is not a natural orator. Nor is he a natural treasurer. So this budget, and budget speech, was always going to be tough for him.

It's hard when you start by creating a false narrative of a Budget Crisis, that is easily discredited by economists, the Opposition, businesses, and pretty much everyone that understands the basics of economics.

It's harder when you break as many election commitments as this Government has, after spending the last 3 years hammering the previous Gillard/Rudd Government on breaking its election commitments.  The level of hypocrisy is astounding.

The speech didn't actually provide a lot of detail in terms of the specific spending cuts and the revenue increases, apart from the those already announced in the media. In looking at the the actual Budget papers, you see the "Devil in the detail".

Here are some (and only some) of the items that may affect a lot of our clients.

Taxation:

• Abolition of the Dependent Spouse Tax Offset from 2015/16.
• Abolition of Mature Age Worker Tax Offset from 2015/16
• Introduction of 2% Temporary Budget Repair Levy on incomes higher than $180,000 from 1st July 2014.
• Reintroduction of indexation of fuel excise (even higher petrol prices, everyone).
• Changes to HECS/HELP repayment rates to accelerate repayments.
• The company tax cut of 1.5% is still on (unless you are one of the country's biggest companies).

Family Tax Benefits

• When your youngest child turns 6, or your income is more than $100,000, you will no longer be entitled to Family Tax Benefit Part B.
• Reduction in end of year Part A supplements from $726 per child to $600 per child.
• Family Tax Benefit Part A payments - no indexation for 2 years.

Superannuation and Pensions

• There will be a 4 year deferral of the increase of the rate of compulsory superannuation paid. The current rate of 9.25% will remain in place until 30th June 2018, then increase each year by 1/2% until it reaches 12%. 
• The increase in the pension age to 70 will not happen until 2035. Changes will be made from 2025. (However, given this is over 10 years away, any announcement made now about this is not worth anything.)

Health

• The introduction of a $7 Medicare co-contribution payment (because apparently the Medicare levy you pay now isn't a contribution)
• Those with concession cards and children under 16 will have their contributions capped at 10 visits.

Spending Cuts
Amid the dazzling array of cuts in the Budget papers, a few stood out for me:

• Spending on the Arts to reduce by $87.1 million  over the next 4 years
• Cuts in funding to the ABC of $35.5 million over the next 4 years
• Cuts in funding to the SBS of $8 million over the next 4 years
• Cuts in funding to Science and Research Agencies of $119.2 million over the next 4 years
• Abolition of Tools for Your Trade Incentive Programme (saving $914 million)
• Cessation of the Ethanol Production Grants Programme (saving $366 million)
• Cuts to funding of the Australian Taxation Office of $143 million over the next 4 years

Local Matters:
Still waiting on something from our new Federal Member, Cathy McGowan.
UPDATE: Follow her comments on Twitter.


My Reaction
A change in Government always results in a change of spending priorities. It happens every time.

What I think makes this Budget different is the way in which the message leading up to the Budget has been so scrambled, and delivered in such a piss-poor manner. We have a Budget Crisis that still allows a promotion of the ideologies of the current Government, leading to poor decision making of spending allocations, whilst at the same time not really addressing the fundamental long term problem of the Budget, which is revenue raising, not spending.

 The end result of this is that the budget burden has fallen more heavily on those least able to afford it, families, and those dependent on welfare of some sort.

The budget cuts to education and health over the next few years are just sickening. Gonski is just a distant memory, and our country's current and future children will be the worse for it.  And given that Education and Health are the primary responsibilities of the State Governments, expect a deterioration of State budgets (and State/Federal relations) over the coming years as the Federal funds reduce to a trickle.

The reduction in spending will lead to a real reduction in Government services, but it will also result in a slow down in the economy. With job cuts of 16,000 and tens of billions in spending reduced, this will hit businesses and will trickle down to further job cuts in the private sector.

We will have austerity measures which will have the impact of reducing consumer confidence. The recession we have to have (or that they want us to have?).

The only upside here is that I can see real problems with the Government getting a large part of their Budget measures through an increasingly hostile Senate. Labor and the Greens will be against most of these measures, and the initial comments from Clive Palmer seem to indicate that his senators will be against it as well.

We were all expecting it to be something like this. But that doesn't make the Budget any better.

Good luck everyone. We could all be in for a bumpy ride.

Motor Vehicles. Why Today's Announcement by the Goverment Could Cost You.

Kevin Rudd formally announced a change in policy concerning the pricing of carbon today. In all honesty this change will have marginal, if any, impact on most of us and the way we live our lives. However one of the initiatives announced in order to pay for this change will end up impacting a lot of small businesses out there, and it has nothing to do with electricity.

Fringe Benefits can mean a lot of things, but in an employment setting it relates to all the non-cash  benefits you get, or have access to. Up until 1985 this was a lucrative part of a person's overall remuneration, and included company paid restaurant meals, entertainment, and certainly the use of company cars for private use.

A lot of that changed with the instroduction of Fringe Benefits Tax by the Hawke Government in 1986. Almost overnight, those business involved in corporate entertainment, such as restaurants, saw their sales smashed as many businesses sought to reduce their exposure to this new tax by cutting out the entertainment altogether.

Fringe Benefits Tax affected a whole variety of other non-cash payments as well, including low interest loans, housing benefits, discounted stock and motor vehicles.

Motor Vehicles were always going to be a tricky part of Fringe Benefits Tax law, as a lot of cars are genuinely used for business purposes. Think of people in sales or itinerant contractors and professionals, driving from client to client to client, every day. "Cars aren't a fringe benefit, they are a necessary part of doing business", was the argument from the corporate sector. And, to an extent, the government agreed.

Fringe Benefits Tax on cars were therefore allowed to be calculated in one of two ways. The first was by calculating the private use of a car, after completing a log book for 12 weeks showing what that private use was (The Operating Cost Method). Great for some, especially if you could keep the necessary paperwork showing high business use.

The other method was a calculation involving the price of the car and the total kilometres travelled. This was known as the Statutory Formula Method. This ended up being the default calculation for those unwilling, or unable, to keep log books.

A couple of years ago the Statutory Formula Method got a bit of a make-over. Up until then, the more kilometres you drove annually, the smaller the effective calculation was. For example the Fringe Benefits Tax was calculated based on 7% of the cost of the car if you were driving more than 40,000 km annually (as opposed to 26% of the cost of the car if you drove less than 15,000 km per year). If you drove a lot (and not necessarily for work purposes either) you could significantly reduce your exposure to this tax. The changes that were brought in were to scrap (over time) the different percentages so that eventually the Fringe Benefit was going to be calculated based on 20% of the cost of the car. The Operating Cost Method was still allowed.

Today's change will effectively scrap the ability to use the Statutory Formual Method on any car bought as part of a salary package from today onwards. Any existing cars used in salary packaging will still have the two options available to calculate the least amount of Fringe Benefits Tax Payable.

"So what?" you might ask. As a small business owner, especially one operating in a company or trust structure that owns your car, this change could potentially cost you a couple of thousand dollars a year in tax. Think about this:

• You currently own a car and are considering trading it in for a new one. You have never kept a log book and have been happy to use the Statutory Formula Method to calculate the Fringe Benefit Value of the car.  If you change the car now, that option goes out the window.  Do you delay that purchase? For how long?
• Your business has salary packaged not only your car, but your spouse's car as well. The spouse's car needs changing.  How useful is it going to be to keep a log book for that car? What do you do with the salary packaging there?
• You bite the bullet and start a log book for your car. You use the car for private purposes more than you thought. How will this impact on your tax?
• You keep a log book and are subsequently audited by the tax office, who reject your log book as being incorrectly completed. Now what?

A lot of questions. Not many answers. Certainly none that are going to provide certainty for an already struggling automotive industry. Salary packaging firms will also feel the pinch. The ABC reported this afternoon:

Shares in McMillian Shakespeare, one of Australia's biggest providers of salary-sacrificing services, plunged by 15 per cent after the announcement before being placed in a trading halt.

If you are not in small business you won't perhaps understand the potential ramifications that this announcement will bring. And bearing in mind that the government believes it will raise $1.8 billion over the next few years, it will affect a lot of businesses.

However, if you are not in small business, think about this. Do you currently get your vehicle salary packaged as part of your employment? You may be a nurse, a teacher, or even a government employee. You don't use your car much for work purposes. The potential cost to you for any car you may want to salary package will be just as significant as it is for a small business owner.

Now, whilst this has only been announced by Government today. a lot of things will need to happen before this becomes law.  If Parliament is recalled before the election you know that both the Liberal and National parties will oppose this tax change. There is also the possibility that the Greens will reject this measure as they don't appear happy with the overall package being announced today. So there is a chance this will not occur this side of the election. If Parliament is not recalled, then this may well become part of the policy platform for the Labor Party. A pretty bold move, given that the unions associated with the automotive industry will more than likely oppose this.  After the election then? Who knows.

Still, this potentially has some pretty nasty ramifications for small business owners, and cannot be ignored.

2013 Federal Budget

Last year, on a different blog site, I reviewed the 2012/13 Federal Budget.

If you haven't read it yet, take a few minutes to look over it. Amongst some of my thoughts of that budget I predicted that the $1.5 billion surplus wouldn't happen, as well as GWS failing to win the 2013 AFL premiership. The "My Reaction" part, at the bottom, still stands as true today as when I first wrote that 12 months ago.

Now, unlike past budgets where the facade of secrecy has been paramount, save a few well chosen leaks here and there, this year it appears that a lot of the significant and highly visible aspects of the budget have already been formally announced.

Having said, it's only after Wayne Swan has delivered his (frankly boring) budget speech (his Swan Song? - sorry) that some of the details begin to emerge. A couple of surprises amongst it all too.  But to be honest, this budget could have been far worse than it ended up being.

Let's have a look at those areas that will affect our clients the most:

Individuals and Families :

• The baby bonus will be scrapped from 1st March 2014 and be replaced with increased Family Tax Benefit Payments, though at lower rates and with lower income thresholds. This means that if you are wanting to get that Baby Bonus, get busy!
• Those tiny income tax cuts that were going to come in to offset the increase in the carbon price have been deferred as the carbon price won't be increasing. The increase in Family Tax Benefits to compensate for the increase in carbon price has also been scrapped.
• The net medical expense tax offset will be phased out. If you are claiming them in the 2013 tax year, they will hang around a bit longer. In all honesty this particular "carve out" arrangement makes absolutely no sense to me. And will make no sense for those clients trying to make the claim in future years. A shocking decision, this one.
• Disaster Income Recover Subsidy payments (but only those made between 3rd January and 30th September this year) will be exempt from income tax. While the exemption makes sense, there should be no date limitations placed. It's another one of those special considerations that make you scratch your head in wonder.
• Medicare will increase by 0.5% to partially fund the National Disability Insurance Scheme. I personally think this is a fair thing, and probably didn't go far enough. The purpose of the Scheme has absolute merit, and I think that there needed to be "buy in" by taxpayers into the scheme. I think a 0.75% or even 1% increase in Medicare would not have been unreasonable.
• HECS/HELP discounts for upfront and voluntary payments will be scrapped, removing the only reason why you would want to pay these debts off earlier than they need to be.

Businesses:

• You may have heard about some changes to make PAYG tax instalemnts monthly payments instead of quarterly. All our clients can ignore this one as the two annual turnover thresholds ($1 billion in 2016 and $20 million in 2017) make this a non-event. Even if it did, this is one of those budget decisions that is effectively fiddling the books, as it doesn't increase the amount of tax raised, just changes the timing of the payments.

The Tax Office:

• Every year the tax office receives extra funding to support one or more targeted audit operations. This year there a couple of interesting ones:
• $67.9 million to undertake compliance activity in relation to taxpayers who have been involved in "egregious" tax avoidance and evasion using trust structures. Now from what I understand the word egregious can mean either outstandingly bad or remarkably good. What about normal and legal tax minimisation using trust structures, like pretty much most small businesses out there? Is that egregious? I don't think so, but that doesn't mean that the Tax Office thinks the same way. Stay tuned on this one.
• The Tax Office will also increase compliance activity targeted at restructuring activity that facilitates profit-shifting opportunities. What the hell does this mean? Does this mean a sole trader wishing to transfer their business into a company or trust structure will be targeted? Changing partnerships? This one may also be one to keep an eye out for, as I reckon there is a bit more to this than meets the eye.

Other:

• More spending on education under the "Gonski" reforms, but cuts to university funding.
• Lots of spending on new roads, though not much on rail, I see. (Update - Yes, I neglected to include the Metro Rail Tunnel as part of this assessment. Interestingly, the total project is worth $9 billion, 1/3 contributed by Federal Government and 1/3 by State Government. The remaining third will be raised through private sector payments, creating some form of public private partnership. Forgive me for being a bit cynical, but I don't believe this project will go ahead, or not in its current format.)
• More job cuts to the public service. This comes on the back of already large reductions outlines in last year's budget. Either there has been a lot of excess staff over the last few years, or these cuts are really going to start impacting on the provision of services (has anyone tried to call either Centrelink or ASIC in the last few months? Get through to someone within 30 minutes?)

Local:

• Our local Federal Member (at least until the upcoming election, where we change electorates), Rob Mitchell, has been silent on Twitter tonight. Unlike last year. I think that means no new spending or no new benefits for our area. I guess that's what happens when your community moves into a safe liberal seat.

My Reaction:

Ignore the headline figures as they are meaningless. Every year they are nothing except guesses that the treasury department provide to the Treasurer of the day and then gets trumpeted as though it is gospel. Both sides of politics are guilty of this. And the estimates are almost always poor.

It was about time that the Treasurer stopped the pretence of the importance of budget surpluses. I said as much in my analysis of last year's budget. This was always going to be a tricky budget, coming just before an election that, as most media commentators are predicting, Labor are set to lose. There were no irresponsible hand outs as we saw in Costello's final budget. The big spending packages of NDIS and education have been a long time coming. The continuing spending on transport infrastructure is reasonable. No doubt pain will be felt here and there as some of the spending cuts filter through to programs that we currently get benefits from. But such is life.

The markets shouldn't overreact to this budget. I am sure the media commentators and the opposition will, though.

Abbott and Hockey will have the job in front of them to provide a reasonable response to this budget without sounding like broken records and overusing the words "trust", "dishonest" or "incompetent", as they normally do. But their alternative solution is to do .... what, exactly?  We don't know, because at the moment they don't know. No clue at all.

A lot of people, including most of the media, seem to like bagging the current treasurer's record of economic management. Personally I can't see it. I think our country's current economic performance compares favourably to pretty much any other country in the world. And whilst there is some pain being felt locally, it is nothing like that experienced in Europe and North America.

So, your thoughts now. What do you think?