Well, in case you missed it, last night the 2017 Federal Budget was handed down by Treasurer Scott Morrison.
As usual, the Budget “morning after” is a busy time at Empire as we collectively go through the proposals, discuss the impacts and opportunities, and decide on action to take with our clients as a result of the changes.
In comparison to previous year’s Budgets, from a financial planning perspective this one has been kind to us, with relatively few proposals that require significant changes to strategies or outcomes for our clients.
We have attached a Budget Overview courtesy of our colleagues at BT, however, have highlighted a few key areas that would be of interest to our clients or their children or parents.
As always, we are on hand to answer any queries you may have. Otherwise, if we feel this is of direct impact to you, stand by and we will be in touch, or raise at your next scheduled meeting with us.
Housing and Super
Incentives for older Australians to downsize their home
Effective date: 1 July 2018
Affected clients: Australians aged 65 or above who wish to ‘downsize’ their home
From 1 July 2018, a person aged 65 or over will be able to make a non-concessional contribution of up to $300,000 from the proceeds of selling their home. These contributions will be in addition to those currently permitted under existing rules and caps. Importantly, the work test requirements that currently apply to persons aged 65 or older will not apply to these contributions, and they can also be made by those with more than $1.6 million of total superannuation. This measure has the potential to allow for top-ups to existing superannuation balances, and provides an opportunity for some people to access the benefits of the superannuation system for the first time. The measure will apply separately for each member of a couple, meaning a couple could jointly contribute up to $600,000 of sale proceeds into super. In order to access this measure, the house must have been owned for at least 10 years.
Empire’s verdict: This may appear to be attractive at first blush, however if all other income producing assets are already in super, then income from $300 000 may not exceed the tax free threshold, limiting the benefit of this strategy to future CGT relief only. Also, we’d have to look very closely at the impact this may have on Centrelink benefits for those taking funds out of an exempt asset (their primary residence) and placing it in an income stream structure.
Introduce a first home super saver scheme
Effective date: 1 July 2017
Affected clients: Individuals who are saving to purchase their first home
From 1 July 2017, home ownership will be encouraged by allowing future voluntary contributions to superannuation made by first home buyers to be withdrawn (from 1 July 2018 onwards) for a first home deposit, along with associated deemed earnings. Voluntary contributions can be either non-concessional (or after tax) contributions or concessional (pre-tax) contributions, such as those through salary sacrifice arrangements. Importantly, compulsory superannuation guarantee contributions cannot be accessed under this scheme.
Concessional contributions and earnings that are withdrawn will be taxed at the individual’s marginal rate less a 30 per cent tax offset. Combined with the existing concessional tax treatment of contributions and earnings, this will provide an incentive that will enable first home buyers to build savings more quickly for a home deposit. Under the measure up to $15,000 per year and $30,000 in total can be contributed, within existing caps. Both members of a couple can take advantage of this measure to buy their first home together.
Empire’s verdict: We’ve run the sums, and for someone on a marginal tax bracket of 39% (ie – earning over $80 000 per annum) the benefit could be in excess of $6000, and in the tax bracket below that one, around $4600. We are yet to see the detail of how this will be administered, but this may be worthwhile exploring for our younger, higher income producing clients, or the children of our clients.
Increase in Medicare levy
Effective date: From 1 July 2019
Affected clients: Those subject to the Medicare levy
The Medicare levy increased from 1.5% to 2.0% of taxable income on 1 July 2014 to help fund the National Disability Insurance Scheme (NDIS). To ensure the NDIS is fully funded into the future, the Medicare levy will be further increased to 2.5% of taxable income from 1 July 2019. In addition, other taxes which are based on the highest marginal tax rate (plus applicable levies), such as the fringe benefits tax rate, will be similarly adjusted.
Empire’s verdict: Nobody likes to pay more tax, however it is difficult to argue against the cause. Will be offset for top marginal income earners by the cessation of the Temporary Budget Repair Levy (see below)
Extension of $20,000 instant assets write-off for small business
Effective date: availability extended by 12 months to 30 June 2018
Affected clients: Small businesses with a turnover of up to $10 million
The $20,000 instant asset write-off allowing a small business with turnover up to $10 million p.a. a tax deduction for the purchase of assets worth up to $20,000 in the year of purchase was due to end on 30 June 2017. This tax concession will be extended for a further 12 months to 30 June 2018. Assets valued at $20,000 or more (which cannot be immediately deducted) can continue to be placed into a small business simplified depreciation pool and depreciated at 15 per cent in the first income year and 30 per cent each income year thereafter. The reduced tax liability resulting from the tax deduction frees up cash flow for small business owners which can be used to sustain and/or expand their businesses. From 1 July 2018, it is proposed that the asset value thresholds will revert to the previous $1,000 limit.
Empire’s verdict: Great for small businesses, and for those that sell products to small businesses, and is designed to stimulate spending in the economy. As we always maintain though, just because you can claim a tax deduction, doesn’t mean you should spend money you otherwise don’t need to spend. Spending a dollar to get 30 cents back in tax is still spending 70 cents you didn’t need to.
Cessation of the Temporary Budget Repair Levy
Effective date: 1 July 2017
Affected clients: Individuals with taxable income in excess of $180,000 pa
The 2% additional tax on an individual’s taxable income in excess of $180,000 was introduced in 2014/15 and was levied for three financial years ending 2016/17. This Levy will cease to apply from 1 July 2017.
Empire’s verdict: The government held true to its promise that this was to be a temporary measure only, and did not extend this beyond the legislated 3 year period it was intended for. It would have been easy to pick on this taxpayer segment and justify it accordingly, so good to see this was not the case.
Reinstatement of the Pensioner Concession Card
Effective date: 1 July 2017
Affected clients: Pensioners who lost their Pensioner Concession Card as a result of changes to the Age Pension asset test from 1 January 2017
The Government will reinstate the Pensioner Concession Card for pensioners who lost their card as a result of losing their Age Pension entitlement following the changes to the pension assets test from 1 January 2017.
Energy Assistance Payment
Effective date: 20 June 2017
Affected clients: Australian residents on qualifying payments
A one-off energy assistance payment of $75 for single recipients and $125 per couple will be made to those eligible for qualifying payments on 20 June 2017 and who are Australian residents.
Empire’s verdict: Both measures will be welcome to senior Australians.
Disallow deductions for travel expenses for residential rental property
Effective date: 1 July 2017
Affected clients: Owners of residential investment property
From 1 July 2017, the Government will disallow deductions for travel expenses related to inspecting, maintaining or collecting rent for a residential rental property. For anyone owning residential investment properties, including self-managed super funds, this may have a slight impact on overall tax payable. If the investor wishes to engage a real estate agent to undertake these activities for them, those costs will remain deductible. It’s important to note that it is only the costs of travel that are being denied tax deductibility. Costs of repairs and maintenance remain deductible, as do travel costs relating to commercial (nonresidential) property.
Empire’s verdict: This is probably a deduction many who claimed it would have seen as a guilty win. Will hopefully put some added pressure on the interstate property spruiker market.
Expanding tax incentives for investing in affordable housing
Effective date: 1 January 2018
Affected clients: Investors in qualifying affordable housing
From 1 January 2018, the CGT discount for individuals will be increased from the current 50% to 60% for Australian residents who invest into qualifying affordable housing. To qualify for the higher discount, housing must be provided to low to moderate income tenants, with rent charged at a discount below the private rental market rate. The affordable housing must be managed through a registered community housing provider and the investment held for a minimum period of three years.
Empire’s verdict: Again, at first blush this seems like an added bonus to invest in this type of housing. However, we would advise to act with extreme caution, as we are “not convinced” (to put it lightly) of the future capital gains one would expect to receive on these types of properties, based on experience to date. Beware of the spruikers who will use this is a new sales tool.
Limit plant and equipment depreciation deductions to outlays actually incurred by investors
Effective date: From 1 July 2017
Affected clients: Future purchasers of established rental properties
From 1 July 2017 plant and equipment depreciation deductions will be limited to outlays actually incurred by investors in residential real estate properties. These changes will apply on a prospective basis, with existing investments grandfathered. Plant and equipment forming part of residential investment properties as of 9 May 2017 (including contracts already entered into at 7:30PM (AEST) on 9 May 2017) will continue to give rise to deductions for depreciation until either the investor no longer owns the asset, or the asset reaches the end of its effective life. Investors who purchase plant and equipment for their residential investment property after 9 May 2017 will be able to claim a deduction over the effective life of the asset. However, subsequent owners of a property will be unable to claim deductions for plant and equipment purchased by a previous owner of that property.
Empire’s verdict: And with that, the entire property depreciation schedule industry is all but wiped out. Bad news for those buying established properties, as the tax incentives attached to it have been reduced. Will put another differentiator on which the “new house and land package” investment industry will use to differentiate itself by, which is a concern. Thankfully, any existing property owners are exempted from the change.
As always, these changes, considerations and opportunities need to be taken in the context of your personal financial situation. This information is general in nature, and you should not act on any of the content above without speaking to us first.