After the massive changes to superannuation which begin from 1 July 2017 and which we are all still trying to digest and implement this year’s Federal Budget is light on big changes, but as they say the devil is always in the detail!
This is a little bit of a lengthy article but we have provided some of the highlights to Budget 2017, so grab your morning coffee or tea and if you have any questions please do not hesitate in contacting me at the office.
Before reading the below note that these are only announcements and will require passage through Parliament before being legislated.
From 1 July 2019, the Medicare levy will be increased to 2.5% to help fund the National Disability Insurance Scheme.
Property Investors have a had a few changes around deductions which can be claimed and there has been a focus on foreign investors tax consequences which come into effect from Budget Night. For everyone travel expenses to investment properties will stop from 1 July 2017. From Budget Night there will be changes to plant and equipment deductions which can be claimed.
Further to this focus on ‘housing affordability’. Some key measures include, from 1 July 2018:
• A person aged 65 or over will be able to make a non-concessional contribution (tax free) to superannuation of up to $300,000 from the proceeds of selling their home.
• First home buyers will be able to withdraw voluntary contributions to superannuation but only those made from 1 July 2017, along with associated deemed earnings, for a first home deposit.
The Government will also introduce a major bank levy from 1 July 2017. The levy will raise $6.2 billion over the forward estimates period.
Financial Service and Education
Major banking levy
The Government will introduce a major bank levy (the levy) for Authorised Deposit-taking Institutions (ADIs), from 1 July 2017. The levy will be an annualised rate of 0.06 per cent on loan facilities such as corporate bonds, commercial paper, certificates of deposit, and Tier 2 capital instruments. The levy will raise $6.2 billion over the forward estimates period, on the basis that this represents a fair additional contribution from our major banks and will assist with budget repair.
My view is this levy maybe a little too late in the current cycle and will impact sharesholders (including diversified super fund investors) and bank account holders more than the ‘big banks’! Time will tell how this will impact remembering that the ‘Big 4 Banks’ are in the top 10 holdings on our stock exchange.
Australian Securities and Investments Commission – improving financial literacy
Over four years from 2017-18, the Australian Securities and Investments Commission (ASIC) will be
given an additional $16 million to broaden its financial literacy program. The cost will be partially offset by an increase of $12.0 million over three years from 2018-19 in the statutory levy amount recovered from entities regulated by ASIC. For some great resources checkout http://www.moneysmart.gov.au
Personal taxation
There have been changes made on the some deductions around investment property expenses to aid in ‘housing affordability’ as well as an increase to the Medicare Levy to help fund the NDIS. Those with HECS / HELP repayments will have adjustments in the thresholds for repayments and for Small Business Owners there is a continuation of deductions which were introduced a few years back.
Increasing the Medicare levy low-income thresholds
The Medicare levy low-income thresholds for singles, families and seniors and pensioners will be increased from the 2016-17 income year as follows:
• Singles – increased to $21,655
• Family – increased to $36,541 plus $3,356 for each dependent child or student
• For single seniors and pensioners –- increased to $34,244
• For seniors and pensioners – increased to $47,670 plus $3,356 for each dependent child or student.
Increase in the Medicare levy – National Disability Insurance Scheme
The Medicare levy will be increased from 2.0 to 2.5 per cent of taxable income from 1 July 2019 to ensure the National Disability Insurance Scheme (NDIS) is fully funded. Other tax rates that are linked to the top personal tax rate, such as the fringe benefits tax rate, will also be increased.
Child care rebate – upper income threshold
The Government will achieve savings of $119.3 million over three years from 2018-19 by better targeting the Child Care Subsidy only to families with incomes below $350,000 per annum (in 2017-18 terms). The upper income threshold of $350,000 per annum will be indexed annually by CPI from 1 July 2018.
Disallow the deduction of travel expenses for residential rental property
From 1 July 2017, deductions for travel expenses related to inspecting, maintaining or collecting rent for a residential rental property will be disallowed. This measure will not prevent investors from engaging third parties such as real estate agents for property management services. These expenses will remain deductible.
Limit plant and equipment depreciation deductions to outlays actually incurred by investors
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.
Improving the small business capital gains tax concessions
The Government will amend the small business capital gains tax (CGT) concessions to tighten the rules so the concessions can only be accessed in relation to assets used in a small business or ownership interests in a small business. This measure will take effect from 1 July 2017.
Extending the immediate deductibility threshold for small businesses
Small businesses will be able to immediately deduct purchases of eligible assets costing less than $20,000 first used or installed ready for use by 30 June 2018. Only a few assets are not eligible (such as horticultural plants and in-house software).
Assets valued at $20,000 or more (which cannot be immediately deducted) can continue to be placed into the small business simplified depreciation pool (the pool) and depreciated at 15 per cent in the first income year and 30 per cent each income year thereafter. The pool can also be immediately deducted if the balance is less than $20,000 over this period (including existing pools).
The current ‘lock out’ laws for the simplified depreciation rules (these prevent small businesses from re-entering the simplified depreciation regime for five years if they opt out) will continue to be suspended until 30 June 2018.
Higher Education (HELP)
This measure includes:
• introducing an efficiency dividend of 2.5 per cent in 2018 and 2019 on the Commonwealth Grant Scheme (CGS)
• rebalancing contributions toward course fees by increasing student contributions through the Higher Education Loan Program (HELP) by 7.5 per cent (1.82 per cent annually over four years from 2018), with a commensurate reduction in funding universities receive under CGS. Student contributions will increase for all Commonwealth supported students from 1 January 2018 regardless of when they began their study
• ceasing the Commonwealth loading for enabling programs and replacing it with a student contribution through HELP
• revising the income thresholds for repayment of HELP debt, repayment rates and the indexation of repayment thresholds from 1 July 2018. A new minimum threshold of $42,000 will be established with a 1 per cent repayment rate and a maximum threshold of $119,882 with a 10 per cent repayment rate.
Wealth Creation – Housing Affordability
Expanding tax incentives for investments in affordable housing
From 1 January 2018, the capital gains tax discount for resident individuals who elect to invest in qualifying affordable housing will be 60% (rather than 50%).
To qualify for the higher discount:
• Housing must be:
»» provided to low to moderate income tenants
»» managed through a registered community housing provider and the investment held for a minimum period of three years.
• Rent must be charged at a discount below the private rental market rate.
Annual charge on foreign owners of underutilised residential property
Foreign owners of residential property that is not occupied or genuinely available on the rental market for at least six months per year, will be subject to a new charge. The charge will be levied annually and will be equivalent to the relevant foreign investment application fee imposed on the property at the time it was acquired by the foreign investor.
This measure will apply to foreign persons who make a foreign investment application for residential property from 7:30PM (AEST) on 9 May 2017.
Capital gains tax changes for foreign investors
Foreign resident capital gains tax (CGT) regime changes:
• Foreign and temporary tax residents will be denied access to the CGT main residence exemption from 7:30PM (AEST) on 9 May 2017, however existing properties held prior to this date will be grandfathered until 30 June 2019.
• CGT withholding rate for foreign tax residents will be increased from 10.0 per cent to 12.5 per cent, from 1 July 2017.
• CGT withholding threshold for foreign tax residents will be reduced from $2 million to $750,000, from 1 July 2017.
• the principal asset test will apply to an associate inclusive basis from 7:30PM (AEST) on 9 May 2017, for foreign tax residents with indirect interests in Australian real property.
Establishment of the National Housing Finance and Investment Corporation
The National Housing Finance and Investment Corporation (NHFIC) will be established to operate an affordable housing bond aggregator. The function of the aggregator is to provide cheaper and longer term finance for community housing providers.
Superannuation
Stability and confidence for superannuation is the good news coming out of the 2017-18 Federal Budget. With Super Fund members still working through the wide-reaching and complex superannuation changes of the last Budget which take effect from 1 July 2017, this Budget’s minimal changes will result in a period for members to ensure they have the correct strategies in place.
The main change impacting superannuation involves allowing people aged 65 and over to downsize their home and gain exemptions to superannuation caps, a First Home Super Saver Scheme and the rounding up of minor technical changes already announced.
The key changes proposed for superannuation are:
Downsizing exemption to superannuation caps
From 1 July 2018, individuals aged 65 and over will be able to downsize their family home and place proceeds up to $300,000 per member into their superannuation fund without breaching any of the current superannuation caps, work test and age test. The measure will apply to a principal place of residence held for a minimum of 10 years. This means even if an individual has a total superannuation balance of $1.6 million or more they will not be restrained from making an after-tax contribution with their house proceeds. This exemption also extends to the annual after-tax contribution limit which is currently $100,000.
First Home Super Saver Scheme
Individuals can make voluntary contributions of up to $15,000 per year and $30,000 in total to their superannuation to later withdraw to purchase a first home. Voluntary contributions and associated earnings that are withdrawn will be taxed at a person’s marginal tax rate less a 30% offset. The measure will assist first home buyers to save a deposit for their home faster.
Integrity of limited recourse borrowing arrangements
The Government is proceeding with amendments to the transfer balance cap and total superannuation balance rules for limited recourse borrowing arrangements (LRBAs). The outstanding balance of an LRBA will now be included in a member’s annual total superannuation balance for all new LRBAs once this legislation is passed.
Integrity of non-arm’s length arrangements
The Government will amend the non-arm’s length income rules to prevent member’s using related party transactions on non-commercial terms to increase superannuation savings by including expenses that would normally apply in a commercial transaction.
Social Security and Family Payments
Consistent Income Treatment for Families Receiving Family Tax Benefit Part A
From 1 July 2018, a consistent 30 cents in the dollar income test taper will apply for Family Tax Benefit Part A families with a household income in excess of the Higher Income Free Area (currently $94,316).
This will ensure that higher income families are subject to the same income test taper rates.
Family Tax Benefit Part A rate increase – not proceeding
The increase in the maximum rate of Family Tax Benefit (FTB) Part A from 2017-18 announced as part of the 2015-16 MYEFO measure titled Family Payment Reform — a new families package will not proceed.
Family Tax Benefit payment rates The current Family Tax Benefit (FTB) payment rates will be maintained for two years at their current levels from 1 July 2017. Indexation of the FTB payment rates will resume on 1 July 2019.
Energy Assistance Payment
There will be one-off Energy Assistance Payment in 2016-17 of $75 for single recipients and $125 per couple for those eligible for qualifying payments on 20 June 2017 and who are resident in Australia.
Qualifying payments include:
• the Age Pension
• Disability Support Pension
• Parenting Payment Single
• Veterans’ Service Pension
• Veterans’ Income Support Supplement
• Veterans’ disability payments
• War Widow(er)s Pension
• permanent impairment payments under the Military Rehabilitation and Compensation Act 2004 (including dependent partners) and the Safety, Rehabilitation and Compensation Act 1988.
Enhanced Residency Requirements for Pensioners
Residency requirements for claimants of the Age Pension and the Disability Support Pension (DSP) will be revised. From 1 July 2018, claimants will be required to have 15 years of continuous Australian residence before being eligible to receive the Age Pension or DSP unless they have either:
• 10 years continuous Australian residence, with five years of this residence being during their working life (16 years of age to Age Pension age); or
• 10 years continuous Australian residence, without having received an activity tested income support payment for a cumulative period of five years.
Existing exemptions for DSP applicants who acquire their disability in Australia will continue to apply.
Liquid Assets Waiting Period
The maximum Liquid Assets Waiting Period will increase from 13 weeks to 26 weeks from 20 September 2018 when a claimant’s liquid assets are equal to or exceed $18,000 for singles without dependants or $36,000 for couples and singles with dependants.
Pensioner Concession Card – reinstatement
The Pensioner Concession Card will be reinstated for pensioners who were no longer entitled to the pension following changes to the pension assets test from 1 January 2017. Reinstating the Pensioner Concession Card will enable pensioners to access Commonwealth subsidised hearing services.
Working Age Payments Reform
Seven working age payments and allowances will be consolidated into a new JobSeeker Payment. Key points:
• On 20 March 2020, Newstart Allowance and Sickness Allowance recipients will transition to the new JobSeeker Payment.
• JobSeeker Payment will be set at the same rate as Newstart Allowance and current mutual obligation exemptions for Sickness Allowance will be retained.
• Widow Allowance will be closed to new recipients from 1 January 2018 and will cease on 1 January 2022, when all remaining recipients have reached Age Pension eligibility age. Widow Allowees transferring to the Age Pension will receive a higher payment rate.
• Partner Allowance, which has been closed to new recipients since 20 September 2003, will cease on 1 January 2022, when all remaining recipients have reached the eligibility age for the higher payment Age Pension.
• Widow B Pension, which has been closed to new recipients since 20 March 1997, will cease on 20 March 2020. Recipients will transition to the Age Pension with no change to their payment rate.
• Wife Pension, which has been closed to new recipients since 1 July 1995, will cease on 20 March 2020. Most recipients will transition to the Age Pension or Carer Payment at the same payment rate. Australian residents who do not qualify for these payments will transition to the new JobSeeker Payment. Transitional arrangements will ensure that those who transfer to the JobSeeker Payment have their rates preserved; however, those aged under 55 will be required to meet mutual obligation requirements.
• Bereavement Allowance will be closed to new recipients from 20 March 2020 and will be replaced by the new JobSeeker Payment. Existing recipients of Bereavement Allowance will not be impacted by the change. Newly bereaved people on the new JobSeeker Payment will receive a triple payment in the first fortnight and current mutual obligation exemptions will be retained.
A new ‘more equitable’ participation framework will apply from 20 September 2018. Key elements include:
• Aligning the participation requirements for recipients aged 30 to 49 with those for recipients under 30.
• Recipients aged 55 to 59 will only be able to meet up to half of their participation requirements through volunteering.
• Recipients aged between 60 and Age Pension age will have a new activity requirement of 10 hours per fortnight that can be met through volunteering.
Implications for Australian assets
Commentary from Dr Shane Oliver – AMP Capital Investors.
Cash and term deposits – with interest rates remaining low, returns from cash and bank term deposits will remain low.
Bonds – a major impact on the bond market from the Budget is unlikely. With five year bond yields at 2.2%, it’s hard to see great returns from sovereign bonds over the next few years.
Shares – the potential boost to confidence from this Budget could be a small positive for the Australian share market. Overall, the Budget’s impact is unlikely to be huge. Construction stocks may be beneficiaries and banks losers.
Property – the Budget’s housing affordability measures may have an impact on home prices over time if they incentivize states to ramp up supply, but it’s likely to be marginal in the short term. We continue to expect momentum in the Sydney and Melbourne property markets to slow.
Infrastructure – the ramp up in infrastructure spending should in time provide more opportunities for private investors as many of the resultant assets are ultimately privatised.
The $A – the Budget alone is unlikely to have much impact on the $A. With the iron ore price falling back again, the interest rate differential in favour of Australia continuing to narrow and the $A still too high, the downtrend in the $A is likely to resume.
Scott Malcolm has been awarded the internationally recognised Certified Financial Planner designation from the Financial Planning Association of Australia and is Director of Money Mechanics. Money Mechanics is a fee for service financial advice firm who partner with clients in Melbourne, Canberra and Sydney to achieve their life and wealth outcomes. We are authorised to provide financial advice through PATRON Financial Advice AFSL 307379.
The information provided on this article is of a general nature only. It has been prepared without taking into account your objectives, financial situation or needs. Before acting on this information you should consider its appropriateness having regard to your own objectives, financial situation and needs.