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With the 2018-19 federal budget set to be handed down in less than a week’s time, we discuss some of the themes that are likely to pop up on 8 May 2018.
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What to expect from the 2018 federal budget
02 May 2018
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Being a pre-election budget, the government will also be looking to use whatever capacity it has to win some easy votes and distinguish itself from the Opposition.
Economic update ahead of budget
The budget deficit has narrowed to $23.6 billion for 2017-18, representing a $5.8 billion improvement since the last budget. The improving budget position has largely been driven by stronger commodity prices and higher forecasts for company tax. This has provided the government with the small opportunity it needs to deliver some pre-election budget sweeteners.
Since the Mid-Year Economic and Fiscal Outlook in late 2017, the economic news has been generally positive with employment adding 400,000 more jobs. Prices for bulk commodity exports, which represent the key driver of Australia’s economy, are also higher than previously assumed. However, forecasting commodity prices is notoriously difficult. At the same time, lower forecasts for wages and unincorporated business income are expected to weigh on individuals' income tax receipts.
Business investment is forecast to grow by 2 per cent in 2017-18 and 3 per cent in 2018-19, representing a stronger pace than forecast at budget. Wage growth has been more subdued than expected since budget (0.25 per cent lower), and is now forecast at 2.25 per cent through the year to the June quarter 2018, and 2.75 per cent to the June quarter 2019. It is forecast to lift as the economy strengthens, inflation picks up and excess capacity in the labour market is reduced.
This all means that the government has little margin for error with any budget sweeteners. It is also a reminder that the improving budget position hasn’t been “hard won”, and instead represents a windfall from global economic activity that can quickly evaporate.
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Small personal tax cut?
While the budget deficit has narrowed to $23.6 billion since the last budget, the government still only has a small window for budget sweeteners this year.
Being a pre-election government, the Treasurer will need to come up with something positive for the average worker. So don’t be surprised to see a small, but welcome, tweak to the personal tax rates and thresholds. This was the case in 2016 when the 32.5 per cent personal tax threshold was increased from $80,000 to $87,000. That measure cost the government $4 billion, so don’t expect anything more than a token “sandwich and milkshake” tax cut in a non-election year.
Standard deduction for work expenses
As far back as the Henry tax review and the 2010 budget, the government has tantalised taxpayers with the prospect of a standard tax deduction for work-related expenses, say $500. A standard deduction has long been recognised as an important element towards a system of pre-filled tax returns to make life easier at tax time. This proposal has also received recent attention as part of a parliamentary inquiry into tax deductibility. While the committee is yet to report back to government, perhaps 2018 will be the year when we see a firm announcement in this area?
Business $20,000 instant asset write-off
The $20,000 instant asset write-off for businesses is set to end on 30 June 2018. From that time, the threshold will revert to $1,000. With Labor announcing its own “permanent” accelerated depreciation policy in March 2017, the pressure is now on the government to extend its existing measure beyond 1 July 2018.
Under Labor’s proposal, businesses would receive an immediate 20 per cent tax deduction for new eligible assets worth more than $20,000. The balance of the asset would be depreciated in line with normal depreciation schedules from the first year. The Labor proposal would be permanent so that businesses could continue to take advantage of an immediate 20 per cent deduction whenever they made a new investment in an eligible asset. So don’t be surprised to see a pro-business budget announcement in the form of an extension of the government’s $20,000 instant asset write-off beyond 30 June 2018.
Company tax
In the face of the US tax reforms, the government may be reinvigorated to push for a further reduction in the corporate tax rate to maintain international competitiveness against the US rate of 21 per cent. Belgium and France have also announced plans to reduce their statutory rates below 30 per cent by 2020, and the UK is scheduled to reduce its company tax rate to 17 per cent in 2020.
However, further changes to the company tax rate are unlikely to be announced in this year’s budget but watch for any fine-tuning to win support from the crossbenches. The government is still trying to push through its legislation to progressively extend the 27.5 per cent corporate tax rate to all corporate tax entities by the 2023-24 income year. The corporate tax rate would then be cut, for all corporate tax entities, to 27 per cent (2024-25), 26 per cent (2025-26) and 25 per cent (2026-27 and later income years). The progressive extension of the lower 27.5 per cent rate is proposed to commence from 2019-20 for corporate tax entities with aggregated turnovers of $50 million or more.
|
Financial year |
Aggregated turnover less than |
Company tax rate |
|
2017-18 |
$25m |
27.5% |
|
2018-19 |
$50m |
27.5% |
|
2019-20 to 2023-24 |
$50m |
27.5% |
|
2024-25 |
$50m |
27% |
|
2025-26 |
$50m |
26% |
|
2026-27+ |
$50m |
25% |
Superannuation
The super industry already has enough on its plate implementing the 2017 reforms. As is the case with any major reforms, refinements are often necessary to address unanticipated consequences. This suggests that any additional budget measures are likely to welcomed by the super industry. Watch for any finetuning to reduce the complexity surrounding death benefit planning under the new $1.6 million pension cap.
In a welcome move, the Tax Office has already extended the lodgement date for SMSF annual returns to 30 June 2018. This has provided some breathing space for SMSF trustees and advisers to make their elections for CGT transitional relief under the pension reforms.
Social security means test for lifetime pensions
The retirement income sector is eagerly awaiting the government’s final decision on the social security means testing rules for pooled lifetime retirement income streams and deferred lifetime annuities. For the purposes of the age pension means tests, a government policy paper has proposed to assess 70 per cent of the income paid from such pooled lifetime income streams. For the assets test, 70 per cent of the purchase price would be assessed at purchase date (but reduced to 35 per cent once a person reaches life expectancy). However, the superannuation industry has called for a 60 per cent/30 per cent structure for the assets test to provide the necessary incentive for retirees to take up such lifetime income streams. This is one area where the government could look to provide some good news for self-funded retirees.
Thomson Reuters Tax and Accounting Team
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