Budget 09 – Worse Than Expected, super perks slashed, high earners hit hard, home buyer grants slim survival… and before you read on you may recall that last year they projected a $20Billion surplus and we ended up with a $30billion deficit… $50billion turnaround…
Disclaimer:
nvestors are in the firing line after the Rudd government today unveiled a comprehensive reduction of key elements of the private superannuation system along with a string of targeted cutbacks aimed at higher earners.
As expected the worst setbacks for investors came in the area of voluntary superannuation contributions – specifically reductions to the amount you can concessionally contribute (a cornerstone of salary sacrifice arrangements) and a significant dilution of the co-contribution scheme (a measure that had been designed to encourage lower earners in families to contribute to super).
These setbacks will be all the more disturbing for investors after the government offered no sign of anything to suggest it was about to open a market for inflation-linked bonds. Separately, earlier intimations from the government that private investors could actively participate in much-trumped nation-buildings projects such as the National Broadband Network have not come to pass.
The government said it would reduce the cap (i.e. the maximum) on concessional contributions from $50,000 to $25,000 and importantly it will also reduce the transitional cap for the over 50s from $100,000 to $50,000. For many Eureka Report members this will be the worst single item in the budget because up to $50,000 per annum that might have been put in to super (and taxed at 15%) will now have to be taxed at marginal income tax rates.
This ruling will take effect on July 1 – there will be some ‘grandfathering’ arrangements for investors with defined benefit pension arrangements as of today (May 12).
Treasurer Wayne Swan highlighted what he described as a ‘significant’ $30 increase in the base pension rate: The move will be the most expensive single measure in the budget dwarfing expenditure on universities and hospitals. However, the number of people who will be eligible for the pension will continue to reduce.
Dotted throughout the budget papers are a range of measures that cut or trim a range of useful schemes that have been popular with investors and high earners over the last decade.
What defines a ‘high earner’ is variable within the budget papers – for the purposes of eligibility for a new parental leave bonus you must make less than $150,000, for the purposes of avoiding an increased Medicare levy surcharge rate you must make less than $90,000 and to remain entitled to the full benefit of the private health rebates for singles you must make less than $75,000.
The key items hitting higher earners are:
- The private health insurance rebate of 30% is to be phased out.
- From July 1 there will be three tiers – If you make more than $75,000 the rebate drops to 20%, if you make more than $90,000 the rebate drops to 10%, if you make more than $120,001 (yes, that is an extra dollar in there – no obvious explanation from Treasury) the rebate is removed entirely.
- A range of ‘family’ payments will have tighter eligibility tests: The government will pause inflation (Consumer Price Index) indexation of upper income eligibility thresholds for three years. This – and related changes in indexation - will hit the baby bonus and other ‘family’ tax benefits.
- The Medicare levy surcharge rate will increase for singles (at $90,000 or above) and for families (at $180,000 or above) – this is a big change that will mean a huge amount of people will now need to pay the Medicare levy for the first time.
- The overseas income (91 day) tax exemption is to be scrapped for all, except aid and defence workers. A new measure to avoid double taxation will involve a foreign income tax offset for foreign tax paid on the foreign employment income.
For sharemarket investors there are only a few items of immediate interest.
- There is a tightening of the tax concessions applying to employee share schemes through the removal of an existing tax deferral option.
- There are a number of ‘green’ initiatives that may help small cap environmental stocks, especially in solar power.
In relation to measures that were rumoured:
- There is no attempt to dilute or interfere with the current dividend imputation system.
- Similarly there is no attempt to tinker with the tax benefits of margin lending.
There is, however, some compensation in what is otherwise a regressive budget for many investors – property prices may be sustained to a degree by a surprise extension of elements of the First Home Owner’s Grant.
With strong expectations the grant might be scrapped altogether the government has decided to keep the ‘boost’ going for another six months.
Under the terms of the original first home owner grants scheme new houses and existing houses had a $7,000 grant. The Rudd government’s boost meant the grants jumped to $21,000 for new homes and $14,000 for existing homes.
The government has now announced that the ‘boost’ aspect of the grants will continue for another six months after June 30. But the scheme will fade fast: under the terms detailed in budget papers the ‘boost’ (i.e. the extra on top of the original $7,000 grant) will fall to $14,000 for new homes and $10,500 for established homes.
And though there are some residual attractions for investors who are able to take advantage of the home buyer grants – or to capture value in the lower end of the residential market – there are moves by the government to clampdown on any remaining tax advantages in non-commercial businesses such as hobby farms or wineries. The measures will mostly apply to individuals with incomes of over $250,000 per annum.
According to budget papers there will be a ‘tightening of the rules applying to non-commercial business losses to prevent high income individuals deducting losses from activities that are unlikely to make a profit against their salary or other income.
Similarly, there is also a warning the government intends to ‘ensure shareholders in private companies and their associates are taxed when they use company assets for private purposes.’
For owners of small businesses there are a handful of positive initiatives – though they are not substantial on a total budget expenditure basis. The key measure is
- A ‘boost’ to the tax deductions available on business expenses. Small businesses will be able to claim a ‘bonus tax deduction; of 50% of the cost of eligible assets.
On wider macro features of the budget there were few surprises after an exceptional series of ‘leaks’ by the government in recent weeks
- The budget deficit for next year – the year to June 30 2010 – will be $57.6 billion after expectations ranged between $50 billion and $70 billion.
- The revenue write downs due to a softer economy come to $210 billion.
- The projected peak unemployment rate in this economic cycle will be 8.5%
- There will be a contraction in GDP next year – the year to June 2010 of 0.5%.
Source
Once again you may recall that last year they projected a $20Billion surplus and we ended up with a $30billion deficit… $50billion turnaround…
Remember Live with Passion
George Mihos
Melbourne Australia
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