Australia’s annual budget is handed down in May every year.
On the surface, the Government appears to have pulled off a miracle, with a budget that has boosted both the stock market (up by 1% from the opening, and holding) and the currency (up slightly to US$1.086 in early trade). Such a phenomenon is almost unheard of in the current economic environment, and undoubtedly will be envied by many governments around the world.
We have been helped by the fact that we have been starting from a relatively high level of GDP growth, thanks to China and its demand for resources, and the fact that we have already been increasing interest rates for the past 15 months or so and keeping debt very much under control by comparison to the rest of the world, without creating a currency threat/disaster.
There are those who will criticise the fact that “more could have been done”, but the divergence between a weak east coast economy, and a booming resources sector and the benefits that that is creating for the other half of Australia, is an issue that is difficult to deal with on a fiscal basis.
It would appear that the balance is likely to look OK to the man-in-the-street, and politically, that is the aim.
The key problems, though, are:
We are likely to see a continuingly strong A$, which won’t help markets;
The RBA is already at the limit in many aspects of its economic targets, and the risk has increased that those limits will be exceeded sooner, rather than later; net result: higher interest rates;
Big business is doing fine, but smaller business will continue to struggle. In other words, the “two-tiered” Australian economy will continue, if not worsen, over the next few years, but the overall data will continue to look good.
In other words, the budget is almost too good from a macro perspective, and yet few will feel that they have received enough from a micro perspective.
Key Factors
Individuals
There have been no changes made to the personal tax thresholds or rates. For the first time in nine years, there are no personal tax cuts, while taxpayers will pay more personal tax when the new flood levy applies next year.
People aged 50 and over with less than $500,000 in super will be able to contribute an extra $25,000 in pre-tax dollars each year.
The 50% pension minimum drawdown relief will be reduced to 25% in 2011 -12 and will return to normal levels from 1 July 2013.
People under 18 will no longer be able to access the low income tax offset to reduce tax payable on unearned income such as dividends, interest and rent.
Lower income earners will receive a greater proportion of the low income tax offset through their pay packets.
Fringe benefits tax on salary packaged cars will be simplified to a single rate of 20%.
Families with teenage children may benefit from additional Family Tax benefit payments.
Overall, this was not a tough budget as promised, with most revenue measures being targeted and only a modest revenue impact.
Business
Australian small businesses with a turnover of less than $2m will be provided with an instant tax write off of the first $5,000 of any motor vehicle purchased from 2012-13 income year.
The current vehicle fringe benefit tax will change to a flat 20% of the vehicle’s capital value. The new measure will apply to new vehicle contracts entered into after 10 May 2011.
Removal of the dependent spouse tax offset for a dependent spouse aged less than 40 years old from 1 July 2011.
Changes to the low income tax offset. This increases the claimable proportion of the Low Income Tax Offset (LITO) through Pay As You Go (PAYG) from 50 to 70%.
Additional Measures
Treasurer Wayne Swan handed out minimal lining for the average hip pocket in his fourth budget, which he said “imposed the strictest spending limits” as the government returned a cash deficit of $22.6 billion.
As expected parents with teenage children are some of the winners. More families are now eligible for higher payments under Family Tax Benefit part A, which has been extended beyond children aged 16 to children aged 19.
From January 1 next year, parents with teenagers up to 19 years old who are in high school or vocational training programs will also get about $161 more a fortnight – the rate for children aged 13–15 years old.
That’s up to an extra $4208 a year for each eligible 16-17 year old and up to $3741 a year for 18 and 19 year olds that stays in school. And from July 1 these parents will be able to use “advance payments” of up to $1000 to deal with unexpected bills throughout the year.
Some parents on higher incomes may have a surprise waiting for them when they suddenly find themselves no longer eligible for a range of family benefits.
The Government confirmed it will freeze the income thresholds for family benefits – including Family Tax Benefit A and B, the Baby Bonus, and Paid Parental Leave for primary carers – for three years instead of raising them in line with inflation in order to save $1201.9 million over four years.
This means some families may suddenly find themselves ineligible for benefits if mum or dad gets a small pay rise.
The Budget will hit university students as a result of spending cuts. From now on, those that pay their Higher Education Contribution Scheme (HECS) debt up front will get a 10 per cent instead of 20 per cent discount on their fees, and those who make voluntary Higher Education Loan Program (HELP) repayments of over $500 to the ATO will get their bonuses slashed from 10 to 5 per cent, in order to save the Government $479.5 million over four years.
The Budget also focuses on helping single parents find work, spending $131 million on special training, career advice and other services.
Next year the Government will start investing $47.1 million over four years to trial a teen parent plan on thousands of mums in 10 disadvantaged communities around the country. Under the plan teenage parents’ social security payments – worth up to $625 a fortnight – will be cut if they don’t go back to school to finish year 12 when their baby turns one.They will also have to attend meetings at Centrelink for half a year after their baby is born to prepare them to go back to school. Currently, parents don’t have to look for work until their child turns six. If they refuse to participate without a good reason, their welfare benefits will be suspended.
Single parents will see most of the Budget’s promises hit the hip pocket in a two years’ time, when those on Newstart Allowance will get to take home an extra $3900 a year under a “more generous” income test.
This year’s Budget focuses on getting “disengaged youth” back into the workforce, with a $558 million national Workforce Development Fund for to create 130,000 training places, despite the unemployment level falling back under 5 per cent this year.
Published with permission, biz-e-news.