2017 Budget Edition

Getting the right balance

Treasurer Scott Morrison’s first budget of the Coalition’s second term in office marked a significant shift in tone from the tough stance of its three previous budgets. Gone is the mantra of debt and deficit. Instead the Treasurer has balanced the government’s resolve to live within its means with promises to tackle the cost of living and provide the services people need to get ahead.

The centrepiece of the budget is the use of ‘good debt’ to fund $75 billion worth of infrastructure projects to create jobs and promote economic growth. To achieve this along with a commitment to returning the budget to surplus it has also introduced measures to cut everyday spending on universities and welfare.

In line with the new distinction between ‘good debt’ and ‘bad debt’, the Treasurer announced that from 2018-19 the government will no longer borrow to pay for everyday expenses.

The Big Picture

The government forecasts an underlying budget deficit of $26.1 billion this financial year, which is lower than the $28.7 billion forecast in the Mid-Year Economic and Fiscal Outlook. The deficit is projected to rise to $29.4 billion in 2018-19. Treasurer Morrison chose not to promise a return to budget surplus, instead saying the budget is ‘projected’ to be back in the black in 2021.

The Government’s estimates are based on economic growth ‘rebounding’ from 2.5 per cent to 2.75 per cent next year and 3 per cent beyond that. Inflation is expected to hover around 2 per cent while unemployment will reduce slightly from 5.75 per cent this financial year to 5.5 per cent next year.

Housing affordability

The news is better for younger Australians on the housing front. While the Treasurer says there are no ‘silver bullets’ to improve housing affordability, he unveiled a number of measures to help first home buyers and increase housing supply.

The government will help first home buyers build a deposit with the introduction of a superannuation-style salary sacrifice savings account. From 1 July 2017, individuals can make voluntary contributions of up to $15,000 per year and $30,000 in total to their superannuation account to purchase a first home.

At the other end of the housing market, people over 65 will be encouraged to sell their large family homes, downsize to something smaller and put up to $300,000 into superannuation as a non-concessional (after tax) contribution.

The ‘good debt’ infrastructure philosophy will be extended to housing with the introduction of a UK-style ‘bond aggregator’ as an intermediary to attract more private sector investment in affordable community housing. In another sweetener, the capital gains tax discount on the sale of investment property will increase from 50 per cent to 60 per cent for investments in affordable housing.

The government will also boost the supply of land for housing construction with the release of surplus Commonwealth land beginning with Defence land in Maribyrnong, Melbourne.

Business and banking

The government is seeking to raise $6.2 billion over the next four years by imposing a six-basis point levy on the five major banks. This new tax won’t be imposed on superannuation funds or insurance companies.

The government also plans to introduce a suite of measures to improve competition and transparency in the banking system. It will set up a one-stop shop for dispute resolution for consumers, small business and investors to be known as the Australian Financial Complaints Authority. This will replace three existing regulators.

After initial success by the Tax Office in its crackdown on multinational corporations not paying their fair share of tax, the program will be extended to include foreign partnerships and trusts.

Small business owners with turnover of up to $10 million will be able to write off up to $20,000 on assets purchased for their business for another year. The measure was due to end on June 30.

Roads, rail and runways

The government announced a multi-billion dollar infrastructure program, including the previously announced $5.3 billion second Sydney airport at Badgerys Creek. The government will form a new Commonwealth company to build the project over the next 10 years.

A further $10 billion will go to a National Rail Program to fund urban and regional rail projects over the next 10 years. $8.4 billion, meanwhile, will be spent on a Melbourne to Brisbane inland rail to allow freight to travel between the two cities in under 24 hours.

The government will also fund State infrastructure projects. These include $1.6 billion to West Australia for road and rail projects, $844 million towards Queensland’s Bruce Highway and $1 billion for regional rail upgrades in Victoria with a further $30 million for Tullamarine Airport rail planning.

More funds for education

Schools, early childhood education and skill training are also in for a boost in funding. Schools will get a $18.6 billion boost over the next decade. Under the plan dubbed ‘Gonski 2.0’, most schools will receive more money while some wealthier schools will lose some funding.

Early childhood education will receive an additional $428 million over two years while $1.5 billion will go to the States and Territories over four years for a new Skilling Australia Fund for apprenticeships and traineeships.

Offsetting this are revenue producing changes to university funding. Students will pay more for their bachelor degrees and will have to start repaying their student loans earlier once they enter the workforce.

Health

In a surprise move, the Medicare Levy will be increased from 2 per cent to 2.5 per cent of taxable income from 1 July 2019. The proceeds will be used to ensure the National Disability Insurance Scheme is fully funded in two years’ time.

The government will encourage doctors to prescribe cheaper generic medicines rather than name brands. The saving will allow $1.2 billion to be used to fund the listing of new medicines on the taxpayer-funded Pharmaceutical Benefits Scheme.

As a sweetener for doctors, the freeze on Medicare rebates that GPs are paid for bulk-billed patients will be lifted from July 1 instead of 2020 as previously planned.

The government has also allocated $347.4 million to Veterans’ Affairs for programs including mental health and suicide prevention.

Welfare carrots and sticks

Younger Australians and families will face the brunt of cuts to welfare spending, with penalties including reduced or cancelled payments for not turning up for job interviews or accepting suitable work.

To balance this tough approach, programs to help young parents find jobs, childcare and training will be extended, while aged pensioners and disability pensioners will get a one-off payment to help with rising energy bills this winter.

Immigration and border protection

In a revamp of the heavily criticised 457 visa system, $1.2 million will be raised from a levy on foreign workers to help fund training for local apprentices.

Defence spending will increase to 2 per cent of GDP by 2021, three years ahead of schedule.

Looking ahead

The lift in infrastructure spending is welcome news for the construction industry in the short to medium term but it should also have long term social and economic benefits for the nation.

It needs to be remembered though that the budget announcements are just proposals at this stage. They need to be passed by both houses of Parliament before they become law.

The Turnbull government will be hoping a budget that balances productive spending on infrastructure, schools and health with cuts to everyday spending and help for people struggling with the cost of living will give it a fresh start with voters.

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HOLDING INSURANCE INSIDE YOUR SMSF

The Australian Taxation Office introduced investment strategy requirements in 2012 which stated that Trustees of a self managed superannuation fund must consider whether insurance cover for the members of the fund is required. Trustees are expected to take into account the age of each member and any other insurance the members may already hold. Considering the insurance needs of SMSF members does not mean that you must purchase insurance within your SMSF.

You can purchase the following types of insurance within a self managed super fund:

• Life Insurance
• Total and permanent disability insurance (TPD)
• Income protection insurance

From 1 July 2014, the superannuation law prohibits the trustee of an SMSF from providing an insured benefit in relation to a member unless the insured event is consistent with a condition of release such as death, terminal medical condition, permanent incapacity or temporary incapacity.

Consequently from 1 July 2014 new trauma insurance cannot be taken out in superannuation as it is not consistent with one of the conditions of release. Care needs to be taken when any Total & Permanent Disablement policies or Income Protection policies are acquired within your fund to ensure they align with this requirement. Please note that these restrictions do not apply to continuing SMSF owned policies already in place as at 30 June 2014.

Below is a list of important points to take in to consideration (along with your personal circumstances)  before deciding if purchasing insurance within you fund is the right choice for you.

Cash flow: When insurance is held within superannuation the premiums are paid by your SMSF which can help with personal cash flow. Because the insurance policy will be owned by your SMSF, it is your fund that will pay the premiums.

Tax deductibility of premiums:  Superannuation funds are generally able to claim insurance premiums as a tax deduction for the fund (please refer to table below). The tax deduction is useful in reducing the tax payable by the fund and if the policies are held personally the premiums are generally not deductible by individuals. Please be aware that the policy owner must be the SMSF, that is the policy is held in the trustee’s name ‘as trustee’ of the fund in order for the fund to pay the premium and claim the premium as a deductible expense.

Ability to access funds: It is important to remember that any claims paid from insurance held within your fund will be paid to the SMSF and not directly to you or your beneficiaries. In order to be paid a claim and withdraw the policy proceeds from your SMSF, a ‘condition of release’ is met as summarised below:

• Death
• Permanent incapacity
  • To meet the requirements of permanent incapacity, you must obtain reports from two registered medical practitioners, which confirm:
    • The medical treatment is for an existing medical condition, which is currently:
      • A life threatening illness or injury- A life threatening illness or injury is a medical condition where there is a likelihood to cause death within 24 months
      • Causing acute or chronic pain, or
      • An acute or chronic mental illness, and
        • Acute refers to the rapid progress or onset of a condition suggesting urgency of treatment
        • Chronic refers to a condition having indefinite duration
    • The treatment is not readily available through the public health system.
• Temporary incapacity
  • To meet the requirements of temporary incapacity you must have temporarily ceased work due to physical or mental ill health that does not constitute permanent incapacity.
  • Generally, temporary incapacity benefits may be paid only from the insurance benefits such as an income protection insurance claim.

In some cases, where a condition of release cannot clearly be satisfied, it could result in insurance proceeds being stuck in the fund causing complications at an already stressful time.

Tax on benefits: Once a condition of release has been met, depending on the reason for the payment and depending on who is receiving the payment, there may be further tax consequences to consider. Such tax consequences need to be carefully examined prior to deciding to hold insurance cover through an SMSF as they could unwind many of the tax benefits enjoyed within the fund.

Lump sum death benefits paid to tax dependants are tax-free, tax dependants include:

• Spouse including same or opposite sex de facto or former spouse;
• Children – either under the age of 18 years old or a child that is financially dependant or a child with a disability;
• Any other person within an interdependency relationship with the deceased just before he or she died.

Lump sum death benefits including life insurance proceeds that are paid to non-dependants (for example, an adult child that does not fall in to the abovementioned categories), may be subject to tax depending on the member’s tax-free and taxable components and whether the life insurance premiums have been claimed as tax deductions. An element of the life insurance proceeds may be taxed as an untaxed element, this is subject to 30% tax plus the Medicare Levy where the premiums have been claimed. The calculations are determined using a statutory formula as set out in the Income Tax Assessment Act. Under the formula, the closer to deceased is to retirement the smaller the untaxed element will be. If no deduction is claimed there is no untaxed element.

To safeguard against any adverse tax consequences when life insurance is likely to be paid to a non-dependant, the premium can be paid by the self-managed super fund but no deduction claimed. Life Insurance proceeds paid to a non-dependant for which no deduction has been claimed, forms part of the deceased member’s taxable component which is subject to 15% tax (plus the Medicare Levy depending on whether paid to the estate or directly to a non-dependant).

Higher cost than industry funds: If you purchase insurance within your SMSF you may expect to pay a higher premium than if you obtained insurance offered from a larger industry fund. As larger funds purchase insurance in bulk and receive a discount from the insurance company which they pass on to their members.

Tax deductibility of premiums:  Depending on the type of insurance policy held, the SMSF trustee can claim the following tax deductions for any insurance policies held for the members:

Deductibility of different insurance policy types when held within your SMSF:

The above information is purely factual in nature and does not take in to account personal objectives, situations or needs. The information does not intend to imply any recommendation or opinion about a financial product and does not constitute financial product advice under the Corporations Act 2001. Careful consideration should be given to whether purchasing insurance via a superannuation fund is appropriate in each particular circumstance. 

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