The 2013 Federal Budget
The budget measures contained no real surprises and few measures to excite businesses and stimulate the economy and financial markets from current trend levels. Overall, the measures announced are unlikely to sway the Reserve Bank away from making further interest rate cuts if deemed necessary.
The budget deficit for 2013/14 of $18 billion (equal to 1.1% of GDP) is a stark contrast to the initial forecast of a small surplus. The Government blamed the lower tax revenue arising from the high Australian dollar and global developments.
The Government forecasts that the budget will be in balance in 2015/16 and in a modest surplus position of $6.6 billion (0.4% of GDP) in 2016/17.
By global comparisons, our economic position continues to be competitive relative to other developed economies.
The winners and losers
The budget announced is unlikely to benefit businesses or contribute to higher business confidence. There were no comprehensive tax reforms announced to improve business activity.
Companies involved in infrastructure may benefit from the announced $24 billion spending on infrastructure. However, mining companies should be adversely affected by the Government’s intention to remove the immediate deductibility for expenditure on exploration rights and information.
Implications for investors
The changes announced in the Budget are unlikely to change the Reserve Bank’s easing interest rate bias. The Government’s outlook for inflation over the next few years provides room for the Reserve Bank to make further cuts to interest rates if deemed appropriate to do so.
Disappointingly, there were no measures announced in the Budget to excite or stimulate company activity. The Australian dollar is expected to react negatively to the large budget deficit announced for 2013/14 and 2014/15. However, a lower Australian dollar in itself should be positive for our export related companies and sectors such as resources.
No new policy announcements were made for superannuation. The Budget merely contained a recap of the policy announcements made in early April. Please see our article on the super changes.
Similar to superannuation, very few of these announcements were new. They mostly focussed on shaving back benefits to higher income earners.
a) Medicare levy increase. The Medicare Levy is set to increase by 0.5% to 2% from 1 July 2014 to help fund the National Disability Insurance Scheme (NDIS). For example, Alice earns $70,000 of taxable income. The increase in Medicare Levy will see her pay an additional $350 per year. Ross earns $100,000. He will pay an additional $500 Medicare Levy.
b) Self-education deduction limits. A $2,000 cap is proposed for the amount of self-education expenses that can be claimed as a tax deduction. Self-education expenses include costs of upgrading skills for a current job and include course fees, textbooks, stationery and relevant travel expenses. Employers will continue to be exempt from fringe benefits tax on education and training provided this is offered as a genuine employee benefit and not as part of a salary sacrifice arrangement.
c) Phasing out the net medical expenses tax offset
From 1 July 2013, the net medical expenses tax offset (NMETO) will be phased out for some taxpayers. This follows a hit to the offset in last year’s budget.
a) Exemptions for downsizing homes
Retirees who are age pension age and have owned their home for at least 25 years may gain some means-testing relief if they downsize their home.
Pensioners who sell the home will need to invest at least 80% of the
surplus sale proceeds (up to a maximum of $200,000) into a special
account offered by an authorised deposit taking institution. This
account (and accumulated interest) will be exempt from both the income
and assets tests for up to 10 years provided no withdrawals are made.
This option applies to retirees who move into a retirement village or granny flat or buy a smaller home, provided they were classified as a homeowner before the move. It will not apply to retirees moving into residential aged care.
b) Deeming on account-based pensions Account-based income streams are currently "pension-friendly" under the Centrelink/Veterans' Affairs income testing. Deeming does not apply but instead only income above the deductible amount (deemed return of capital) is assessed. The current rules are proposed to continue indefinitely for people who are in receipt of a Centrelink/DVA pension before 1 January 2015, provided the income stream was also purchased before that date. However, people who apply for a Centrelink/DVA pension from 1 January 2015 or purchase/switch income streams after that date are proposed to be subject to deeming under the income test.
c) Last opportunity for Pension Bonus
The Pension Bonus scheme provided a lump sum bonus to people who continued working and deferred claiming the age pension. This scheme was closed in September 2009 and replaced with the Work Bonus. People who were eligible for the Bonus as at 20 September 2009 but had not registered were able to choose to register. However, this opportunity will close from 1 March 2014.
d) Baby Bonus abolished
The Baby Bonus will be abolished and replaced with an extra payment for families that qualify for Family Tax Benefit (FTB) Part A when they have a new baby and the Baby Bonus will be abolished. Families that receive the Paid Parental Leave will not qualify for this payment. The additional payment for families will total $2,000 for the first child (and all multiple births) and $1,000 for subsequent children. The payments will be split into an initial instalment of $500 and the rest is added to the fortnightly payments over the following three months.