2019 Federal Budget
This summary provides commentary on the macro-economic view of the federal budget announcements and highlights key changes for investors and advisers, particularly in superannuation.
Economic and fiscal outlook
We think the economic assumptions in the budget are quite reasonable, particularly in the shorter term. Real GDP is expected to come in at 2.25% in 2018/19 and 2.75% in 2019/20. Household consumption is expected to slow this year, consistent with our view, and then slightly rebound the following year as wage growth starts to improve (the tax relief will also help). The labour market is expected to remain solid, with the unemployment rate staying at 5% through the forecast horizon.
The budget also provides some tax relief and investment incentives for small business, which should support private investment. The government is forecasting a rebound in mining investment and we have already seen signs of increasing mining employment over the past twelve months.
The government is expecting a small deficit in 2018/19 of $4.2 billion, with a return to surplus in 2019/20 of $7.1 billion. However, this forecasted surplus could shrink significantly if we see a weakening in commodity prices. For reference, the budget sensitivity estimates indicate that if the iron ore price was to fall to $US55 one year earlier than is currently forecast in the budget (by the end of March quarter 2020), tax receipts in 2019/20 would fall by $2.6 billion.
Implications for portfolios
The main implication for markets from this year’s budget revolves around the tax relief to households.
There should be some modest positivity for the retail and consumer focused sectors of the equity market. The tax cuts add a 1-2% boost to after-tax income growth for impacted households. Add 2-2.5% wage growth to this and the combined impact should provide some support to household consumption.
For the Reserve Bank of Australia (RBA), the budget should provide a bit of comfort around the outlook for the consumer. The RBA has been getting more cautious on the outlook, given the pressures on households. In recent speeches, officials have noted that the key driver of the ‘wealth effect’ is expected future income growth (rather than falls in home prices), so for that reason the RBA will likely be pleased to see the tax cuts. The market continues to price in more than one rate cut from the RBA this year, which we think is a bit exaggerated.
The budget changes to superannuation were quite limited this year, as we might have hoped given the significant changes to insurance and fees in superannuation last year with the Protecting Your Super Package.
As expected the budget included pre-election tax relief with an immediate increase in the low and middle income tax offset (up to $1,080 for singles and $2,160 for a dual income family) and the promise of a reduction in the 32.5% tax bracket to 30% in 2024-25.
The budget papers confirmed the changes to the Protecting Your Super Package agreed in parliament and indicated the government’s intention to continue to attempt to legislate insurance opt-in for under 25s and those with superannuation balances of less than $6,000. The proposed start date was pushed back from 1 July 2019 to 1 October 2019.
Another area of focus over the last 12 months has been the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. The budget included significant additional funding for a range of regulators to focus on issues raised by the Royal Commission.
The other changes to superannuation were a small concession for over 65s, an extension of tax relief for fund mergers and some minor administrative changes.
Additional funding for APRA and ASIC and other regulators
APRA and ASIC will receive an additional $550 million in funding over the next 4 years. The additional funding is aimed to give these regulators additional resources to pursue matters raised in the Financial Services Royal Commission including:
- additional enforcement action from ASIC
- expanded regulation from ASIC, including a new conduct focused accountability scheme, as recommended in the Royal Commission
- additional supervision from APRA
- extension of the Bank Executive Accountability Regime to superannuation funds and other APRA-regulated financial institutions.
Other regulatory funding includes:
- establishing an independent financial regulator oversight authority
- undertaking a capability review of APRA
- establishing a Financial Services Reform Implementation Taskforce within the Treasury
- funding for the Office of Parliamentary Counsel for an increase in legislative drafting associated with Royal Commission reforms
- establishment of a industry funded compensation scheme of last resort.
It should be noted that a significant portion of this funding will be bourne by the industry though ASIC’s industry funding model and increases in APRA levies.
Additional contribution flexibility for over 65s
The budget included some additional flexibility for superannuation contributions for over 65s. The changes include:
- An increase in the age at which a “work test” needs to be met before individuals can make voluntary contributions from 65 to 67 from 1 July 2020. This change aligns with the age pension eligibility age which will increase to 67 from 1 July 2023.
- An increase in the age limit for spouse contributions from 69 to 74. Currently contributions cannot be made for a spouse aged 70 or over.
- An increase in the maximum age for the bring forward provision on non-concessional contributions from 65 to 67. The bring forward provision allows an individual to bring forward up to 2 future years of the non-concessional contribution cap allowing a contribution of up $300,000 in one year.
Tax relief for merging superannuation funds
Since the middle of the GFC in 2008 merging superannuation funds have been provided with a tax rollover facility that ensured the value of any tax assets were not lost on merger and tax on unrealised gains was not required to be brought forward.
That tax relief was previously extended as the government encouraged the merger of small and uneconomical superannuation funds.
The budget has announced that the tax relief, which after the latest extension was due to expire 1 July 2020, will become permanent. This will allow the government to continue to encourage superannuation fund mergers, particularly if there are falls in markets and superannuation funds start to accrue tax losses.
Technical changes to the calculation of exempt pension
Income received by superannuation funds on assets backing pension liabilities (both defined benefit pensions and account-based pensions, but not transition to retirement pensions) is normally exempt from superannuation income tax.
There are two ways that the income can be split where a superannuation fund has both pensioners and other members. The budget announced that the superannuation funds will have free choice between those methods from 1 July 2020.
In practice, this is only relevant to SMSFs/SAFs. Currently, if a fund goes from part accumulation/ part pension during a year to 100% pension then the fund is supposed to apply the unsegregated (proportionate) method for the first part of the year and then the segregated part for the balance.
In the future, they will be able to apply the unsegregated method for the whole year. Also, if a SMSF/SAF member has total super more than $1.6 million then the unsegregated method has to be used.The budget also announced that an actuarial certificate will not be required where a superannuation fund only has pensioners. This measure is aimed at self-managed super funds and small APRA funds.
Funding for a Superannuation Consumer Advocate
The government will undertake an expression of interest process for the establishment of a Superannuation Consumer Advocate. The budget papers indicate that this role will advocate on behalf of consumers in government policy discussions and assist with the education of consumers.
ASIC already has a role in financial education with its Money Smart services and the government has a Financial Literacy Board tasked with advising the government on financial literacy matters. There is no indication yet on how this possible new role will fit with those existing financial literacy roles.
Additional funding for the ATO and SCT
The ATO will receive a small amount of additional funding to increase its activity on the recovery of unpaid superannuation liabilities. The budget paper indicates that this measure will not be aimed at small business.
The SCT will also receive some additional funding to ensure that it can complete its open cases prior to winding up at the end of 2020.
Extension of SuperStream to include Superannuation Release Authorities
This change will allow the ATO to send electronic requests to superannuation funds for the payments under release authorities, for example the payment of excess concessional contributions tax or Division 293 tax. This should simplify a process that has been administratively difficult and the cause of some anxiety for members, superannuation funds and the ATO.
The start date for SMSFs entering into the SuperStream rollover system will be delayed until 31 March 2021 to coincide with this change.
Additional funding to address sham employment contracting
The Fair Work ombudsman will receive additional funding ($2.3 million per year) to address the practise of misrepresenting employment relationships as independent contracts (“sham contracting”) to avoid certain statutory obligations and employee entitlements. The newly formed unit will target both deliberate and reckless behaviour by focusing on increased education, compliance activities as well as dedicated resources for enforcement.