Good or bad news? Here's how the Federal Budget changed your taxes

A couple of weeks ago, the Treasurer, Scott Morrison, unveiled his much anticipated Federal Budget for 2018-2019. With a general election now at most a year away, the emphasis was on good news, the centrepiece of which was a package of personal tax cuts, some of which are set to apply from the beginning of the new tax year, little more than a month away.

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The key headline measures for individual taxpayers and small businesses are:

• A series of tax cuts were introduced for individuals in the form of a seven-year Personal Income Tax (PIT) Plan. This will be implemented in three steps, to introduce a low and middle income tax offset (introduced from 1 July 2018, to help those on low and middle incomes), to provide relief from bracket creep and (in several years’ time) to remove the 37% tax bracket altogether.

• The medicare levy increase to 2.5% (announced at the last Budget) will not now happen. The medicare levy will remain at 2%

• No changes to rules around work-related deductions

• One year extension of $20,000 instant asset write-off deduction for capital assets acquired by small businesses. The scheme is now scheduled to end on 30 June 2019, after which the threshold will revert to $1,000.

And here is an analysis of those key changes in a bit more detail.

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Personal taxes

The government intends to introduce a package of tax cuts for individuals over the course of the next seven years, with the first tentative steps set to apply from 1 July 2018 (targeted at lower and middle income earners) and some much more substantial cuts aimed at high earners scheduled for later in the period. All of these new tax measures are subject to legislation being passed through Parliament so the tax cuts (particularly the ones earmarked for later years) are by no means locked in yet.

Step 1: Low and middle income tax offset to be introduced

A low and middle income tax offset (LMITO) will be introduced as a non-refundable tax offset of up to $530 pa to resident low and middle income taxpayers from 2018/19 to 2021/22.

The LMITO will provide a benefit of up to $200 for taxpayers with taxable income of $37,000 or less.

For taxable incomes between $37,000 and $48,000, the value of the offset will increase at a rate of three cents per dollar to the maximum benefit of $530.

Taxpayers with taxable incomes from $48,000 to $90,000 will be eligible for the maximum benefit of $530.

For taxpayers with taxable incomes from $90,001 to $125,333, the offset will phase out at a rate of 1.5 cents per dollar. For taxpayers earning more than $125,333, no offset will be available.

The LMITO will be received as a lump sum on assessment after an individual lodges their tax return. This means that whilst the LMITO will apply from 1 July 2018, taxpayers will only enjoy the benefit of the offset after they lodge their 2018/19 tax return (sometime after 1 July 2019).

The benefit of the LMITO is in addition to the existing low income tax offset.

Taken together, a typical middle income couple stands to be over $1,000 per year better off due to this new tax offset.

Step 2: Changes to the middle income tax thresholds

From 1 July 2018, the top threshold of the 32.5% income tax bracket will be increased from $87,000 to $90,000.

From 1 July 2022, the low income tax offset will be increased from $445 to $645, and the 19% tax bracket will be increased from $37,000 to $41,000.

The increased low income tax offset will be withdrawn at a rate of 6.5 cents per dollar for incomes between $37,000 and $41,000, and at a rate of 1.5 cents per dollar for incomes between $41,000 and $66,667.

From 1 July 2022, the top threshold of the 32.5% income tax bracket will be further increased from $90,000 to $120,000.

Step 3: Removing the 37% personal income tax bracket

The 37% tax bracket will be removed altogether from 1 July 2024.

From 1 July 2024, the top threshold of the 32.5% tax bracket will be increased from $120,000 to $200,000.

Taxpayers will pay the top marginal tax rate of 45% for taxable incomes exceeding $200,000, and the 32.5% tax bracket will apply to taxable incomes of $41,001 to $200,000.

According to the Budget papers, somebody with annual earnings of $100,000 will be $1125 better off a year in 2024-25.

Those on $160,000 will save $3825 a year and those on $200,000 will be $7225 better off.

The table below illustrates how much tax you will save each week (and on a yearly basis) according to your income.

Income	Tax cut from 2018-19		Tax cut from 2022-23		Tax cut from 2024-25
	Per week	Per year	Per week	Per year	Per week	Per year
$20,000	None	None	None	None	None	None
$40,000	$5.58	$290	$8.75	$455	$8.75	$455
$60,000	$10.19	$530	$10.38	$540	$10.38	$540
$80,000	$10.19	$530	$10.38	$540	$10.38	$540
$100,000	$9.90	$515	$21.63	$1,125	$21.63	$1,125
$150,000	$2.60	$135	$38.94	$2,025	$64.90	$3,375
$200,000	$2.60	$135	$38.94	$2,025	$138.94	$7,225
$1,000,000	$2.60	$135	$38.94	$2,025	$138.94	$7,225

Medicare levy increase cancelled

The 2017/18 Federal Budget measure to increase the Medicare levy from 2% to 2.5% of taxable income from 1 July 2019 will not proceed.

Medicare levy low-income thresholds for 2017-18

For the 2017-18 income year, the Medicare levy low-income threshold for singles will be increased to $21,980 (up from $21,655 for 2016-17). For couples with no children, the family income threshold will be increased to $37,089 (up from $36,541 for 2016-17). The additional amount of threshold for each dependent child or student will be increased to $3,406 (up from $3,356).

For single seniors and pensioners eligible for the SAPTO, the Medicare levy low-income threshold will be increased to $34,758 (up from $34,244 for 2016-17). The family threshold for seniors and pensioners will be increased to $48,385 (up from $47,670), plus $3,406 for each dependent child or student.

No changes to work-related expenses deduction rules

Despite the publicity surrounding the high level of work-related expenses (WRE) claims, and the ATO’s strong focus on this area, the Budget did not announce any changes to the rules. The ATO is concerned about taxpayers making mistakes or deliberately lodging false claims in relation to work-related expenses. ATO Assistant Commissioner Kath Anderson said that this year, the ATO will be particularly focused on people “claiming things they’re not entitled to”. Nevertheless, despite the ATO crackdown, the rules themselves were untouched by the Budget.

Small Business Taxes

$20,000 instant asset write off extended

In a welcome move, the current instant asset write-off scheme for small businesses is to be extended by 12 months to 30 June 2019.

This applies to businesses with aggregated annual turnover less than $10 million.

The threshold amount was due to return to $1,000 on 1 July 2018. As a result of this announcement, SBEs will be able to immediately deduct purchases of eligible depreciating assets costing less than $20,000 that are acquired between 1 July 2017 and 30 June 2019 and first used or installed ready for use by 30 June 2019 for a taxable purpose.

Assets valued at $20,000 or more (which cannot be immediately deducted) can continue to be placed into the general small business 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 instant asset write-off threshold and the threshold for immediate deductibility of the balance of the pool will revert to $1,000 on 1 July 2019.

Property investors

There were no significant changes to the fundamental tax rules for property investors. The rules which allow negative gearing of investment properties remain untouched.

Superannuation

Although the government has avoided the major reforms which have proved controversial in recent years, there were a number of eye-catching minor changes to superannuation.

Increased membership of SMSFs and small APRA funds

New and existing self-managed superannuation funds (SMSFs) and small APRA funds will be allowed to have a maximum of six members from 1 July 2019. Currently, the maximum allowable number of members in an SMSF and a small APRA fund is four.

Changes to superannuation insurance arrangements

To combat claims that young and low-income people are being forced to take out expensive insurance within their superannuation that they don’t need, the government has announced that Insurance within superannuation will move from being a default framework to being offered on an opt-in basis for:

• members with low balances — less than $6,000

• members under the age of 25 years, and

• members whose accounts have not received a contribution in 13 months and are inactive.

The changes will take effect on 1 July 2019 and affected people will have a period of 14 months to decide whether they will opt-in to their existing cover or allow it to switch off.

Superannuation fee protection measures to be introduced

A 3% annual cap will be introduced on passive fees charged by superannuation funds on accounts with balances below $6,000, and exit fees on all superannuation accounts will be banned.

The government will also strengthen the ATO’s account consolidation regime by requiring the transfer of all inactive superannuation accounts to the ATO where the balances are below $6,000.

The ATO will expand its data matching processes to proactively reunite these inactive superannuation accounts with the member’s active account, where possible. This measure will also include the proactive payment of funds currently held by the ATO.

These changes will take effect from 1 July 2019.

Mark Chapman, Director of Tax Communications at H&R Block.