Individuals and families
Putting more money in our pockets
The Federal Government wants individuals to have more money to spend to keep businesses going and people employed.
Tax cuts aimed at low and middle income earners have been brought forward to July 2020. The Low Income Tax Offset is increasing, and on top of this the Low and Middle Income Tax Offset has been extended into 2021. By reducing personal income tax, the aim is to promote spending the additional cash in the economy, thereby boosting business confidence.
The Government has brought forward tax cuts that were due to commence in July 2022. These tax cuts will now retrospectively apply from 1 July 2020. As a result the new marginal rates of tax will be as follows:
|2020 INCOME LEVEL||2020 MARGINAL TAX RATE||2021 INCOME LEVEL||2021 MARGINAL TAX RATE
|Over $180,000||45%||Over $180,000||45%
This will mean that an individual earning $50,000 will pay $1,080 less in tax than last year, while someone earning $120,000 and over will pay $2,430 less in tax than last year.
The Low Income Tax Offset is going to increase from $455 to $700 for those earning $37,500. The offset then reduces by 5 cents per dollar until your taxable income reaches $45,000. After this, the offset then reduces by 1.5 cents per dollar until your taxable income reaches $66,667.
In addition, the Low and Middle Income Tax Offset has been extended into the 2021 tax year. The offset starts at $255 for those earning $37,000 or less. This then increases at 7.5 cents per dollar as your income increases, with the maximum amount of the offset being $1,080 available to those earning between $48,000 and $90,000. The offset then reduces by 3 cents per dollar until your taxable income reaches $120,000.
This additional cash can be used in one of two ways – you can either save because you think you need to, or you can spend because you have the ability to. Spending will help build confidence in the economy, but you may want to build up your own cash reserves first.
High wealth individuals
Opportunity to free up cash flow
The budget has been focussed on providing stimulus to business and affected lower income employees. High wealth individuals have been largely unaffected except to the extent of their business investments. This budget provides a great opportunity to use these changes in the context of associated businesses to free-up tax cash flows in groups.
High wealth individuals have not specifically been targeted in the budget measures. However, many of the announcements will have flow-on impacts for their groups.
The major stimulus measures in the budget relate to tax cuts and business investment. In particular:
- bringing forward Stage 2 individual tax cuts to the 2020 year. This will result in a minor reduction in tax for high wealth individuals
- allowing immediate expensing for business depreciating assets
- allowing carry-back of tax losses, and
- FBT and small business threshold increases.
The Australian Tax Office (ATO) is also receiving additional funding to target serious tax crime, and foreign investment register systems are being upgraded. These measures will put further pressure on tax strategies and investment holding structures for wealthy individuals.
High wealth individuals will be looking for new opportunities in a post-COVID environment. These tax changes potentially allow for tax savings through effectively structuring private groups to benefit from loss carry-back rules and capital spending. If done effectively, this could free up more cash for future investment.
Older and disabled Australians
Capital gains exemption on granny flats
A capital gains exemption on granny flats has been announced to combat financial abuse and exploitation of older Australians and those with a disability.
As a way of combatting financial abuse and exploitation of vulnerable Australians, the Government wants arrangements surrounding the rental of granny flats to be documented and legally enforceable. The incentive to document these arrangements will be that the granny flat will not be subject to capital gains tax when the property is sold.
There are many arrangements between elderly and disabled people and their families involving use of granny flats. Following recent reviews of such arrangements, as well as a report into elder abuse, it was recommended that the rental arrangements should always be formalised and have legal effect. The intent is to protect the elderly or disabled person in the event of a family breakdown from financial abuse and exploitation.
The rental arrangements are often left informal to minimise any risk of exposing the property to capital gains tax. The Government is now providing a capital gains tax exemption for the granny flats where the arrangement is properly documented.
This will apply from the income year after the date of Royal Assent.
Formalising these arrangements will provide a sense of security for the elderly or disabled tenants of granny flats. In addition, by having formal arrangements in place, the income from the granny flat may increase the owner’s borrowing capacity going forward.
Retirement and super
Reforms to increase transparency of funds and reduce costs
According to the Budget 2020-21 fact sheet ‘Your Future, Your Super,’ Australian’s pay $30 billion a year in fees to superannuation funds. By introducing a range of further reforms to the sector, members of Australian super funds are expected to collectively save $17.9 billion over the next 10 years.
There have been no new SMSF specific measures announced.
The reforms affecting the larger APRA regulated funds are designed to reduce unnecessary fees when workers have multiple super accounts. This is often the case when a person commences a new job and does not nominate a fund. The ATO will develop systems where employers are able to enter the details of the new employee and be provided with the details of an existing fund linked to the employee. This measure will also assist employers who struggle to get this information on a timely basis to meet their obligations.
The reforms also promote further member engagement by creating a ‘Your Super’ comparison tool to compare MySuper products across funds. The tool proposes to increase competition and transparency across funds, by highlighting fees and investment returns and empowering members to proactively choose a product that is right for them.
By 1 July 2021, MySuper products will be subject to an annual performance test. Where a fund has underperformed it will be required to report to members by 1 October 2021. Funds that fail two underperformance tests will not be permitted to accept new members until their performance improves. This measure will also apply to other superannuation products from 1 July 2022.
Superannuation trustees will be required to comply with a new duty to act in the best financial interest of members by 1 July 2021. They will need to demonstrate how their actions support members’ best financial interests and provide information regarding how they manage their money in advance of Members’ meetings.
Reassuringly, there were no new specific changes that are likely to affect self managed super funds (SMSFs) or the taxation of superannuation. Some measures, such as the increase to six members, have been delayed but are still expected to go ahead unchallenged.
The 50 per cent reduction to pension minimum withdrawal amounts was in place for 2019-20 and is also the case for 2020-21.
No news, can be good news. By not having to contend with major tax or superannuation reforms, taxpayers and their advisers can continue planning using known parameters. At least for the time being, the ability to make contributions (with existing constraints) is unchanged and the sentiment of rewarding aspirational individuals surely has application to superannuation and retirement outcomes too.
Superannuation is both a complex and challenging area requiring appropriate expertise and experience in the provision of advice. Contact your local Bentleys advisor to access the guidance that you require to maximise your individual situation.
Shari Neagle is an Authorised Representative (RN: 1239342) of BWP Advisory Pty Ltd (ABN 29 632 807 179, AFSL 515936).
Disclaimer: This information is general in nature and should not be relied on as advice. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs and seek professional advice before making any decisions based on this information.