Federal Budget 2008
What it means for investors
The first Federal Labor Government budget in 13 years contained little change for investors. Importantly the Labor Government kept its promise and did not make further changes to the tax treatment of superannuation. In resisting the temptation to tinker with the system the Government has provided the opportunity for Australians to gain more confidence in a system that has been subject to constant change for the last 25 years. Hopefully, several years of stability will allow Australians to focus on their retirement savings rather than living in fear that the Government will change the rules and damage their savings.
The 2008 Federal Budget announced further special investment funds for infrastructure (the “Building Australia Fund”), education (absorbing the Liberal’s higher education fund) and health and hospitals.
This Russell Budget Alert summarises aspects of the Budget of interest to investors.
- Personal income tax thresholds
- Low income tax offsets
- Age pension indexation
- Age pension bonus payment
- Education tax refund, child care tax rebate and Medicare levy surcharge threshold changes
- First Home Saver Accounts (FHSA)
- Future Funds
- Withholding tax on managed funds – reduction for non-resident investors
- Means-testing of Government support
- Super income to be counted for Seniors Health Card income test
- Managed funds – changes to the eligible investment rules
- Financial product disclosure simplification
- Superannuation clearing house facility
- Access to tax free lump sums for persons with a terminal medical condition
- Payment of temporary residents’ superannuation to the Australian Government
- APRA levy reduction
- Financial Literacy Foundation
- Summary of Key Budget Figures
1. Personal income tax thresholds
The government has confirmed it will deliver in full the tax cuts it announced during the 2007 election campaign with additional enhancements from 1 July 2008:
- The 30% tax threshold will increase from $30,001 to $34,001.
- The 40% tax threshold will increase from $75,001 to $80,001.
- The 45% tax threshold will increase from $150,001 to $180,001.
Current |
From 1 July 2008 |
||
| Tax threshold($) | Tax rate % * | Tax threshold ($) | Tax rate %* |
| 0-6,001 | 0 | 0-6001 | 0 |
| 6,001 - 30,000 | 15 | 6,001-34,000 | 15 |
| 30,001 - 75,000 | 30 | 34,001 - 80,000 | 30 |
| 75,001-150,000 | 40 | 80,001 - 180,000 | 40 |
| 150,001+ | 45 | 180,001+ | 45 |
| * Plus Medicare Levy | |||
From 1 July 2009:
- The 30% tax threshold will increase from $34,001 to $35,001.
- The 40% marginal tax rate will reduce from 40% to 38%.
From 1 July 2009 |
|
Tax threshold ($) |
Tax rate % * |
0 - 6,001 |
0 |
6,001 - 35,000 |
15 |
35,001 - 80,000 |
30 |
80,001 - 180,000 |
38 |
180,001+ |
45 |
| * Plus Medicare Levy | |
From 1 July 2010:
- The 30% tax threshold will increase from $34,001 to $37,001.
- The 38% marginal tax rate will reduce from 38% to 37%.
From 1 July 2010 |
|
Tax threshold ($) |
Tax rate % * |
0 - 6,001 |
0 |
6,001 - 37,000 |
15 |
37,001 - 80,000 |
30 |
80,001 - 180,000 |
37 |
180,001+ |
45 |
| * Plus Medicare Levy | |
2. Low income tax offsets
It has been announced there will be increases to the Low Income Tax Offset as follows:
Low Income Tax Offset |
|||
Current |
1 July 2008 |
1 July 2009 |
1July 2010 |
$750 |
$1,200 |
$1,350 |
$1,500 |
It will begin to phase out from $30,000 and be phased out completely once income reaches $48,750.
Those eligible for the full low income tax offset will have an effective tax free threshold as follows:
Effective Tax Free Threshold |
||
2008-09 |
2009-10 |
2010-11 |
$14,000 |
$15,000 |
$16,000 |
In addition, low and average income earners will receive half of these benefits in their regular pay, providing a steady income stream as opposed to the previous lump sum payment method.
3. Age pension indexation
To combat rising price of food and energy, the Government will introduce new indexation arrangements for the Age Pension. The Government will index the Age Pension to the highest of:
- Consumer Price Index (CPI)
- Male Total Average Weekly Earnings
- Living Cost Index for Age Pensioner Households.
Our comment: These changes seem fair, however CPI and living costs will probably fall short of weekly earnings in most years meaning the changes have little impact.
4. Age pension bonus payment
A $500 bonus payment will be provided to every Australian over age-pension age on budget night.
5. Education tax refund, child care tax rebate & Medicare levy surcharge threshold changes
Education Tax Refund
A 50% Education Tax Refund on eligible educational expenses will commence from 1 July 2008. Eligible families can claim up to $750 for each child undertaking primary school studies (which translates to a refund of up to $375 per child, per year) and $1,500 for each child undertaking secondary school studies (which translates to a refund of up to $750 per child, per year). These amounts will be indexed annually, commencing 1 July 2009.
Child Care Tax Rebate
The Child Care Tax Rebate for out-of-pocket child care expenses will increase from 30% to 50% from 1 July 2008. This increases the maximum claimable out-of-pocket expenses from $4,354 to $7,500 per child, per year. Also, from 1 July 2008, the rebate will be paid quarterly (instead of annually).
Medicare levy surcharge threshold
From 1 July 2008, the Medicare levy surcharge thresholds for singles will change from $50,000 to $100,000 and for families from $100,000 to $150,000.
6. First Home Saver Accounts (FHSA)
The Government announced several changes to the proposed arrangements for First Home Saver Accounts previously set out in their discussion paper released in February.
Most importantly, the method of calculating the Government’s contribution has been changed. Previously it was based on a person’s marginal tax rate (less 15%). It is now a flat 17% of the amount contributed by the individual with a maximum Government contribution of $850 per annum (indexed). This is an improvement for those on marginal tax rates up to 30% (ie taxable incomes under $80,000 from 1 July 2008) but a reduction for those on higher marginal tax rates.
Personal contributions will be able to be made to the account until the balance reaches $75,000 (indexed).
Finally, the commencement date of the scheme moves from 1 July 2008 to 1 October 2008, although individuals will still be able to receive the full benefit co-contributions if they make sufficient contributions in the remainder of the 08/09 financial year.
The total cost of the scheme over 5 years is estimated at $1.2 billion.
Our comment: The concept of FHSAs is generally well supported, but concerns have been expressed with some of the details of the proposed arrangements as released earlier this year. In announcing separately the outcome of the Government’s consultation process on the new measures, some of these concerns remain:
- The requirement that contributions be made for at least 4 years before money can be withdrawn
- Superannuation trustees can only offer these products through a separate trust to their superannuation fund
- Monies not used for purchasing a home are subject to the superannuation preservation rules
- Some of the administrative requirements seem inefficient and costly.
- The exclusion of large non-public offer funds and exempt funds from providing FHSA
If there are no further changes we have doubts as to whether the FHSAs will be popular with savers.
7. Future Funds
Just over $40 billion from the 2007/08 and 2008/09 budget surpluses will be channelled into three funds that will be used to fund future strategic investments. The fiduciary responsibility of these three funds will be given to the Future Fund Board of Guardians, which will be managed by Australia’s Future Fund. The three new investment funds include:
- A $20 billion initial allocation to a Building Australia Fund to provide for the future infrastructure needs of Australia that cannot or will not be delivered by the private sector or the State governments. The money will be used to fund shortfalls in transport (roads, rail and ports) to help ameliorate the capacity constraints being felt mostly due to the mining boom, as well as to build a high speed broadband network.
- An $11 billion initial allocation into an Education Investment Fund to finance skills, TAFE colleges and universities. This new fund will absorb the existing Higher Education Endowment Fund.
- A $10 billion initial allocation will be made available to a Health and Hospitals Fund which will help finance the renewal and upgrade of the nation’s hospitals and to fund major medical research facilities and projects.
Our comment: The main implication for investors is the potential infrastructure investment opportunities created by the Building Australia Fund, which according to the Australian government is expected to accumulate future budget surpluses and could grow to as much as $100 billion in five years. This increase in the future supply of infrastructure assets should help to abate demand-side pressure that has led to higher infrastructure prices. In addition, because the government will not fully fund all projects, it should also help investors that have been unable to meet their infrastructure strategic allocations to finally have a good chance of getting to their target allocations earlier and hopefully at a good price underpinning solid future returns.
In addition to these three new Funds, the government will invest $3.9 billion into the Future Fund to help it reach its target by 2020.
8. Withholding tax on managed funds – reduction for non-resident investors
The Australian government will reduce withholding tax from 30% to 7.5% on distributions (including income and capital gains) received from non-residents invested in certain Australian domiciled Australian managed funds. The withholding tax will be reduced incrementally from 30% to 22.5 for 2008/09, to 15% by 2009/10 and 7.5% by 2010/11.
Our comment: This should help promote Australia as a financial services hub in the Asia pacific region as it goes some way in removing a barrier to foreign investment in Australia’s managed funds industry. Particularly it should help Australia’s REITS or listed property market by making it more attractive to foreign investors. Russell promotes a global approach to the listed property market.
9. Means-testing of Government support
Expanded definitions of income to include the following items:
‘Salary sacrificed contributions’
‘Salary sacrificed’ contributions to superannuation to be treated as income from 1 July 2009. This is aimed to address the current imbalance where individuals and families have greater access to government support payments than would be possible if their salary sacrificed contributions were paid as salary or wage income.
This will affect government support programs such as superannuation co-contribution and financial assistance delivered through the tax system.
‘Net losses from investments’
Net financial losses and net rental property losses will be treated as income from 1 July 2009 (altering from currently being included in adjusted taxable income).
This will affect tax programs such as Senior Australians Tax Offset, Medicare levy surcharge and dependency tax offsets.
‘Reportable fringe benefits’
Reportable fringe benefits will be treated as income from 1 July 2009 affecting eligibility for tax offsets determined from a dependent’s income.
This will impact definitions of income used for dependency tax offsets, senior Australians tax offset and pensioner tax offset.
10. Super income to be counted for Seniors Health Card income test
The Government will change the Commonwealth Seniors Health Card income test to include gross income from superannuation income streams paid from a taxed source. It will also include income that is salary sacrificed to superannuation in the income assessment.
The Commonwealth Seniors Health Card provides a range of benefits to people who do not qualify for the Age Pension but have an adjusted taxable income of less than $50,000 (for singles) or $80,000 (for couples combined).
Our comment: This measure will increase fairness by ensuring that all income received by seniors, regardless of the source, is counted for the income test.
11. Managed funds – changes to the eligible investment rules
The Government will modify the eligible investment rules to reduce taxation uncertainty for operators of managed funds, especially property trusts. Managed funds that limit their activities to traditional passive investments (for property trusts, this means investing in land for the ‘primary purpose’ of deriving rent) will retain trust taxation treatment instead of being taxed like companies.
For property trusts, the government proposes to introduce a ‘safe harbour’ test to replace the ‘primary purpose’ test. The ‘safe harbour’ test defines a clear threshold allowance of up to 25 per cent each year for non-rental gross income (excluding capital gains).
In addition, the Government proposes to expand the range of financial instruments that a managed fund may invest in or trade.
Our comment: The current eligible investment rules state that any public unit trust carrying on active business activities will be taxed in the same way as a company, thus losing the taxation advantages that trusts have over companies. For property trusts to avoid this, they must only invest in land for the ‘primary purpose’ of deriving rent, as opposed to non-rental income (e.g. property development).
However the current operation of the rules can create difficulties for property trust operators due to the ambiguities in the law. In particular, industry has raised issues surrounding the terms ‘rent’ and ‘primary purpose’.
The proposed safe harbour test of 25% is quite generous and should provide property trust operators with far more certainty with respect to the taxation treatment of their funds. Being an objective test, the safe harbour test will also be easier to audit and administer than the primary purpose test.
12. Financial Product Disclosure Simplification
The Government has reiterated its commitment to simplification of product disclosure statements (PDSs) by allocating $3m in funding over two years to 1 July 2009 to introduce a “standard disclosure form” (SDF) for financial service products.
Our comment: According to previous announcements, it is optimistically intended that the SDF will be of no more than 3 or 4 pages and reflect different products and providers. A forerunner of the SDF may be developed for the new First Home Savers Accounts due to commence on 1 October 2008. The new style SDF had been foreshadowed to be available as early as December 2008 but given the challenges and consultation process necessarily involved it is likely to take longer.
13. Superannuation Clearing House Facility
The Government has confirmed its pledge to fund ($16.1m over three years) a central clearing house facility for employers to use to comply with their superannuation guarantee (SG) choice obligations. The project will be managed by the ATO with the government sponsored facility to be contracted out to the private sector. The facility is expected to be available for employer SG contributions from 1 July 2009 at no cost to small employers (less than 20 employees) and a “small” transaction fee” for larger employers. The facility will be optional for employers to utilise. Businesses that use the clearing house facility will have their legal obligation to make superannuation contributions discharged when payment of the correct amount is made to the clearing house.
Our comment: Further details on this initiative are awaited, including how it might impact on existing clearing house schemes already running in the private sector. This measure may be expected to be accompanied by further simplification of the current choice of fund procedures, whether the government sponsored or an alternate clearing house facility is utilised. A stated aim is to enable an employee to lodge a choice of fund form only once rather than again upon changing jobs – i.e. an employee’s fund choice nomination would be given to the clearing house and it would then automatically remain valid upon change of employers – at least for contributions paid through that clearing house facility.
14. Access to tax free lump sums for persons with a terminal medical condition
The Government will back-date to 1 July 2007 the commencement of the previously announced measure to make superannuation lump sum benefits tax free for people with a terminal medical condition.
15. Payment of temporary residents’ superannuation to the Australian Government
The Government has confirmed the previous announcements on temporary residents’ superannuation but will defer the start date for the payment to the Australian Government to the date of Royal Assent (expected before the end of 2008) following completion of the consultation process.
Our comment: The stated aim of this policy is to reduce the issue of “lost super” accounts. Our view is that the appropriation of temporary residents’ super is poor policymaking. We have concerns over gaps in insurance cover arrangements, interest allocation policy, potential for selection criteria errors by the ATO / immigration dept and the removal of choice of fund for members of superannuation funds.
16. APRA levy reduction
The Australian Prudential Regulation Authority the financial sector supervisory levy on superannuation funds will be reduced by a small amount, reflecting the termination of additional funding for the Superannuation Complaints Tribunal.
17. Financial Literacy Foundation
The Government will not proceed with supplementary funding for the Financial Literacy Foundation. The Government believes the functions of the Foundation are more appropriately carried out by the Australian Securities and Investments Commission (ASIC), which has responsibilities for consumer education in financial services.
Funding for Centrelink’s Financial Information Service will be increased by $10 million over four years and funding for the Commonwealth Financial Counselling program will be doubled. This funding is aimed at improving financial literacy and management skills in the community, particularly in those areas with little or no access to financial counselling services.
Our comment: Russell has been directly involved in initiatives to improve financial literacy and financial security for people. We believe that initiatives to improve financial literacy are important and we hope they are not lost in those government bodies.
18. Summary of Key Budget Figures
|
2007 Budget |
2008 Budget |
Government Revenue and Spending |
|
|
Budgeted receipts |
$246.8b |
$319.5b |
Budgeted payments |
$235.6b |
$292.5b |
Fiscal Balance |
$10.0b |
$23.1b |
Economic Forecasts |
|
|
CPI (07/08) |
2.5% |
4% |
Wages Growth |
4.25% |
4.25% |
Real GDP Growth |
3.75% |
3.5% |
Superannuation Taxes |
|
|
Tax receipts |
$8.30b |
$9.75b |
Value of concessions |
$20.25b |
$27.47b |
Russell Budget Alert is produced exclusively for the information of Russell Investment Group clients. This information is general in nature and should not be used or relied upon as a substitute for specific advice or as a basis for formulating business decisions. Further professional advice should be sought before any action is taken based on matters discussed in Russell Budget Alert.
The contents of Russell Budget Alert may be freely republished provided Russell Investment Group is acknowledged as the source.