Budget 2016: Scott Morrison’s super tax trick

A hit on the superannuation savings of high-income earners and wealthy retirees will help pay for $9bn in tax cuts.

A hit on the superannuation savings of high-income earners and wealthy retirees will help pay for $9 billion in tax cuts for average workers and small employers as the Turnbull government post­pones major budget repair to win back voters at the July 2 election.

LIVE: Coverage of reaction to Scott Morrison’s budget continues here.

A surprise $1.6 million cap on tax-free retirement balances is one of the biggest twists in a budget that also scales back the amount that all workers can put into their super every year.

The $2.9bn increase in super taxes combines with a $3.9bn crackdown on corporate tax avoidance to fatten the commonwealth coffers, along with $3.2bn in savings from delaying controversial government policies and a $1.4bn cut to the public service.

Scott Morrison has used the tax increases on some Australians to fund tax cuts for others, while also revealing a youth employment package that promises 120,000 placements for young jobseekers.

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While small business will get an immediate reduction in the company tax rate to 27.5 per cent, big business will have to wait a decade for the rate to be cut to 25 per cent.

Just hours before the release of the budget, the Reserve Bank ­delivered a benefit for mortgage holders with its unusual move to cut interest rates by 0.25 per cent to a record low 1.75 per cent.

In an optimistic outlook likely to be challenged by economists, the Treasurer is counting on a jump to 3 per cent real economic growth from 2017-18 to help take the budget to surplus by 2020-21.

Mr Morrison admitted his tax cuts would give workers just $315 a year at most by helping workers on more than $80,000 a year, but he argued that this and the tax relief for 870,000 businesses were a down-payment on a bigger ­agenda to cut the tax burden over time. “I’m not claiming this is some great big tax cut at all — that’s not its purpose,” he said. “People will know that when we get the opportunity to cut a tax we’ll cut it.”

Yet the Treasurer’s first budget, handed down days ahead of Malcolm Turnbull formally launching the election campaign, included sweeping and politically risky increases in super taxes such as a rise in contributions tax from 15c to 30c in the dollar for workers earning more than $250,000 a year, copying a Labor policy.

The amount all workers can put in their funds out of their pre-tax income — known as the concessional cap — will fall from $30,000 to $25,000 a year in a highly controversial move that limits the scope for all workers to build up their retirement nest eggs.

But the hit to the ­Coalition’s own electoral base was a $1.6m “transfer balance cap” that imposes bigger taxes on sums above that amount. Those with big accounts will have one year from July 1 to get their balances below $1.6m or face bigger taxes, while a separate $500,000 lifetime non-concessional contributions cap will also restrict the size of retirement ­savings.

BUDGET 2016: Full coverage

Mr Morrison aimed to quell a political backlash to the super changes by using his televised budget speech last night to assure voters that current and former politicians and public servants would face higher taxes on their nest eggs as well. The tough new rules curtail the excesses of the generous super regime opened up by Peter Costello a decade ago and were described as “moderate” last night by Seniors Australia but are provoking ­concern from the Financial ­Services Council and other groups that fear the rules will make super less attractive and force more people on to the Age Pension.

The federal budget reveals deficits of $118.5bn over the four years to June 2019 compared to an estimate of $108.3bn last December for the same period, a $10.2bn setback that is mostly the result of another blow to the government’s revenue forecasts.

The deficit for next financial year is now forecast to be $37.1bn compared to $33.7bn in last December’s budget update, a deterioration of $3.4bn.

Highlighting years of failure in scaling back the deficits, the coming year’s deficit is now likely to be almost twice the $17.7bn prediction for the same year when Joe Hockey unveiled his first budget statement as treasurer in late 2013 — an outlook that was criticised at the time for being too grim.

Labor launched a fierce response last night, attacking the tax cuts and using the bigger deficits as a reason to keep the 2 per cent deficit levy on workers earning more than $180,000 a year, reversing Labor’s own vote to end it on June 30 next year. Signalling a huge election fight on tax, Labor Treasury spokesman Chris Bowen also attacked the extension of a company tax cut to businesses with turnover of $10m, rising to $100m over time. Mr Morrison declared fiscal pressures proved the nation faced a spending problem rather than a revenue problem, yet the budget papers showed policy decisions resulted in a net improvement to the budget bottom line of just $1.7bn over four years.

The Treasurer cited the need to spend $1.2bn on schools and $2.9bn on hospitals, rather than the federal election, as the reason the spending cuts were not greater. In a sign the government has put money away for the campaign, the budget included $2.1bn in savings measures decided but not announced, with the biggest savings coming in 2020. Another $1.6bn in spending decisions were taken but not announced, with the money set to flow as early as this year.

Other parts of the budget show the government will give up about $432.4m in tax revenue, such as by offering tax concessions. All decisions taken but not announced must be revealed before the pre-election fiscal outlook is released 10 days into the election campaign.

Mr Morrison labelled the budget a “new economic plan” for difficult times, scaling back the economic growth forecast from 2.75 per cent to 2.5 per cent for next financial year.

The unemployment rate is expected to improve compared to the official forecasts last December, holding at 5.5 per cent over the four years to 2020, rather than hitting 6 per cent next year. The long-term forecasts show nominal growth rising fast next year, helping to produce smaller deficits. Mr Morrison defended the Treasury forecasts by noting that Australia would continue to benefit from its proximity to Asia, the fastest-growing region in the world. “Yes, we are optimistic but I don’t think unrealistically so.”

Deloitte Access Economics director Chris Richardson described the budget forecasts as close to the “consensus” view but he warned that tighter spending controls would be needed.

“It’s good for an election year. It doesn’t solve the budget problem,” he said.

The business tax changes are the biggest single package in the budget, giving help to small and medium businesses and ensuring that unincorporated businesses are better off when they cannot get the benefit of a lower company tax rate. The company tax rate will fall from 28.5 per cent to 27.5 per cent for small businesses and the group that qualifies for the lower rate will be expanded from those with turnover of $2m to a new benchmark of $10m.

“This will mean 870,000 businesses, employing 3.4 million Australians, will have their tax rate reduced,” Mr Morrison said.

Unincorporated businesses will get an increase in their small business tax discount and get the benefit, along with companies, of an extension in the instant asset write-off for purchases of up to $20,000 — a popular concession to businesses with turnover of less than $10m. Mr Morrison emphasised that savings had been made for all new measures including tax cuts, the company tax reforms and the spending on hospitals and schools.