While this year’s budget wasn’t as overtly brutal on investors as last year’s (think drastic SMSF changes), there’s nonetheless been a number of proposed measures that will potentially impact our property markets and in turn, your portfolio.
Treasurer Scott Morrison was in fine form as he cast his net far and wide with arguably more concerning than constructive proposals, clearly aimed at raising revenue via key investment sectors…including the banks.
Whether all of the measures pass muster as they stand will be a matter for the Senate to ultimately decide, but experts suggest some compromises will have to be made over coming weeks to make some of the budget propositions more palatable.
To save some valuable time…hopefully you didn’t waste too much of it watching the rather unremarkable event that was Budget 2017/18…here are 7 facts about this year’s budget announcement to get your head around as an investor…
1. Negative gearing not touched
Okay, so this might be stating the obvious, given Turnbull had already assured punters he wasn’t prepared to mess with the controversial legislation that allows property investors to claim expenses related to their portfolio.
But let’s start on a positive note, given the amount of conjecture there’s been around what might happen to negative gearing entitlements throughout this entire housing affordability debate.
Likewise, speculation surrounding capital gains tax was quashed, when the 50 per cent discount for investors who hold property for more than a year remained intact.
2. Not everyone will escape…
While negative gearing and CGT have been left alone however, highflying property investors are in for a shock, with travel-related expense claims used to turn holidays into property inspections set to be scrapped.
The loophole is reported to currently cost our government $120 million every year.
“This is an integrity measure to address concerns that such deductions are being incorrectly claimed and abused,” said the Minister Assisting the Treasurer on Housing (yes, that’s a real title!), Michael Sukkar.
“This will rein in a high-growth deduction item and improve taxpayer confidence in the negative-gearing system.”
3. We thought you weren’t going to touch it?
It’s interesting how politicians do things. On the one hand, we’re assured that negative gearing entitlements will remain intact.
On the other however, investor’s wings have been clipped with regard to not only travel related expenses, but also depreciation deductions for plant and equipment associated with the holding of investment properties.
Based on current claims, it’s estimated this will save the government $1.4 billion.
In a recent report from the Financial Review, one property investor declared his reticence to purchase residential real estate after hearing of the proposed amendment.
“The budget was a big surprise…those who negatively geared created a decent tax benefit by this plant and equipment depreciation,” Ramon Tan told the Fin Review.
“Now I’m considering moving into commercial property investments.”
For many in the industry, it’s apparent that while the government has promised not to touch negative gearing legislation on the one hand, they’ve done the exact opposite with some of these measures.
This includes the bank levy, which is a sneaky way to impose a property investment tax without appearing to touch current entitlements for investors.
“It definitely impacts the investment strategies of future investors who want to be positively geared also,” said Tan. “This is a curb on negative gearing by not actually saying so.”
Under current laws, investors can deduct depreciation from rental income under Divisions 40 and 43, with the latter relating to the building’s structure and the former covering ‘plant and equipment’, which includes items like air conditioners and dishwashers.
MCG Quantity Surveyors director Mike Mortlock told the Fin Review that the average depreciation rate is about 30 per cent, but in dollar terms can equate to almost 50 per cent of total deductions for investors.
Tax depreciation quantity surveyors BMT’s chief executive Bradly Beer says for an $800,000, six month old, two bed apartment in Sydney’s Waterloo, an investor with a 37 per cent marginal tax rate could lose $7181 in the first year with these deprecation amendments.
SQM Research’s Louis Christopher said this change would be the “straw on the camel’s back” in cooling investor activity in the markets, with bank lending and rental property deduction changes turning off future investors.
4. Foreign investors to feel the pinch
The introduction of a $5,000 flat levy to be paid on foreign-owned residential dwellings that are left vacant is set to earn the government an additional $500 million, which will help to fund the $30,000 salary sacrifice scheme for first homebuyers. Exactly how this will be policed and enacted remains unclear however.
Further targeting foreign investment, which has been demonized for contributing to housing affordability issues, is a developer and overseas buyer’s cap, which will prohibit developers from selling more than 50 per cent of their residential buildings to overseas buyers.
In addition, the 10 per cent capital gains tax withholding system for foreign investors will be lifted to 12.5 per cent.
5. I got them bank levy blues
This is one of the measures that will potentially have the most far-reaching implications for every Australian. So much so that I’ve dedicated an entire article to its contemplation…click here for more.
6. Some less than super ideas
Another area that will impact investor’s property portfolios and virtually every retiree’s pension fund…click here for more.
7. An interesting development
Of further significance to the housing markets and investors is the government’s proposed National Housing Finance and Investment Corporation.
The $1 billion infrastructure facility will be established to provide loans to recalcitrant councils holding up developments with planning red tape and refusal to fund local infrastructure projects that would encourage property development.
Through the scheme, investors in affordable housing will receive a 60 per cent capital gains tax discount, with the program’s centerpiece being a rewriting of the social and affordable housing compact between the commonwealth, states and territories in a move to alleviate rental stress.
Defence land in Melbourne and Sydney will also be made available for new housing developments, starting with a 127-hectare site in Victoria’s Maribyrnong.
The government has also offered a new $4.6 billion National Housing and Homelessness Agreement, including $375 million for homelessness.
“To support Australian households, the government has a comprehensive plan to impact across the housing spectrum – from the homeless and those who depend on social housing, to first-home buyers and older downsizers,” Sukkar said.
Will it really fix affordability?
Although some of the proposed budget measures will likely impact future buying decisions for property investors, most experts suggest it falls short as the promised, “comprehensive plan to address housing affordability.”
Indeed, some suggest the only real way to ‘fix the problem’ and curb any future bursting of a housing bubble is to encourage those who already hold property to pay down their record high levels of debt now, before the inevitable happens and interest rates start to rise once more.
About the Author
Since 2008, David Thomas has built a business aimed at servicing the needs of property investors, owner occupiers and small business owners. David is recognised as one of the top 10 independent mortgage brokerages in the country, David and his team have settled almost billions of dollars worth of residential and investment loans over the last decade.
Known for his straightforward, relatable style, David believes by educating people about property funding; they fare better in the market. By sharing his expertise openly, some of the people he educates will likely become his clients. It's a win-win approach.
David Thomas is a credit representative (Representative Number 506153) of BLSSA Pty Ltd, ACN 117 651 760 (Australian Credit Licence 391237).