Noels Budget veiw

NEWSLETTER
By Noel Whittaker

17th May 2005

I must confess I was thrilled by last Tuesday’s budget because finally
the Government has produced a budget that addresses the major problems
facing Australia. With an ageing population, and health and welfare
bills skyrocketing, we desperately need incentives that encourage people
to stay at work to produce the taxes to pay for it all.

Thanks to a generous pension and tax system, few retirees pay income
tax any more; while the equally generous family benefit package
effectively wipes out the tax that was once paid by low-income families. For
example, a single income family on $35,000 a year with two children under
13 receives $9,232 a year in family tax benefits. Their tax bill would
be just $6,700. This leaves the entire personal tax burden on the
shoulders of the relatively few Australians who earn more than $45,000 a
year. As Peter Costello aptly put it, “You can’t give a tax cut to people
who don’t pay tax”.

Naturally the media trotted out the knockers, but the majority of
Australians are going to see it as an incentive to work harder.

Only five years ago the top rate of 47% cut in when income reached just
$50,000 a year, but tax cuts since then have increased this to $70,000
a year. Even at that level the unions have been vocal in their
criticism claiming that it wasn’t worth working overtime, because it meant
giving the taxman half of their extra earnings.

Now, in an unprecedented measure, the top rate has been raised to
$95,000 from July 1st 2005, and to a staggering $125,000 from July 1st 2006.
Other tax changes mean that workers will not leave the 30% band until
they earn $70,000 a year. For years there have been calls for a flat
tax; under the tax scales coming in effect in July 2006 anybody earning
$70,000 a year will pay just $16,860 in tax which is equivalent to a flat
rate of 24%. How much better can it get?

There were also calls to cut the top tax rate to 30% to bring it into
line with the company tax rate. It was impracticable and the welfare
lobby would have gone ballistic. But, you have to do the figures to see
how clever Treasury have been. After 1 July 2006, the tax on an income of
$100,000 will be $29,460. Virtually 30% flat – exactly the same as the
company rate.

The hated superannuation surcharge that was conceived by the Howard
Government in 1996 has finally gone. The abolition will take effect from
July 1st 2005 and make superannuation an even better tax saving vehicle.
But the reasonable benefit limits that cap the amount you can hold in
superannuation will ensure that the system is not abused. However, if
you’re in surcharge territory now, don’t delay making deductible
contributions till after June 30. You are still better off losing 27.5% due to
a combination of the 15% contributions tax and the 12.5% surcharge than
taking the money in your pay packet and losing 48.5%.

For years the Left have been calling for abolition of negative gearing.
They should love this budget because the reduction in the tax rates
will mean that the attractiveness of negative gearing will be severely
diminished. Pre GST, when the top marginal rate cut in at $50,000, a
person earning $60,000 a year got an effective 48.5% from the Government
when they borrowed for investment. That will be just 31.5% now and this,
coupled with progressive cutbacks to the depreciation rules, mean that
property investment is not nearly attractive as it was five years ago.
Skill in picking a bargain will now be essential.

Best of all, superannuation splitting with your spouse has finally got
the green light and will come into effect on 1st July 2006. This is one
of the most exciting changes in a decade, and while the detail is still
to come, it is almost certain that employees will be able to instruct
their super fund trustee to transfer at least 60% of their deductible
contributions to their spouse’s superannuation account, even if the
spouse has made large deductible contributions in their own name.

This is a magnificent incentive for those who are trying to fund their
own retirement, and coupled with the recent introduction of term
allocated pensions, mean that a couple can be aiming to have over $1.2
million dollars each in superannuation when they retire. Of course, the way
life expectancies are rising they are going to need it. Just be aware
that super funds will not be compelled to split your super so a major
factor when choosing a fund will be whether they have the back office, and
the will, to do the split for you.

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