Federal Budget 2017: Personal Investment & Superannuation Changes
Personal investment and superannuation changes:
Investors who acquire real estate after 9 May 2017 which includes assets / fittings, etc within the property, which could previously be valued and captured for depreciation purposes will no longer be able to claim these tax deductions;
Investors who ‘visited’ or managed their investment property as part of a broader holiday will no longer be able to claim any part of their travel expenses – simply, most taxpayers failed to properly apportion the previously eligible claim. But even dedicated travel will not be deductible from 1 July 2017;
After all the rumours about the CGT discount being reduced (it isn’t being reduced … yet) the discount is being increased to 60% for investments in ‘qualifying affordable housing’. In some instances this increased discount will be available for existing properties;
From 1 July 2017 – remember last year’s announcements, the superannuation ‘division 293’ tax drops for those with income (as defined) of $250,000 (down from $300,000) – this will catch many more taxpayers!
From 1 July 2017 – remember last year’s budget announcements – the concessional superannuation contribution limit drops to $25,000 (from $30,000 / $35,000, depending upon age);
From 1 July 2017 – remember last year’s budget announcements – the non-concessional superannuation contribution limit drops to $100,000 (from $180,000);
Older Australians to be able to contribute more to their superannuation funds when downsizing from a long-term home;
At the other end of life, from 1 July 2017 prospective first home buyers will be able to make contributions up to $15000 per year (maximum $30000, and within existing caps) and then withdraw the amount along with the earnings (if any), from 1 July 2018.
The long mooted support for first home buyers via superannuation has finally been introduced, but it is a fiction and will benefit almost no-one other than – mostly – higher income, older ‘first home’ buyers.
If you have studied at university and build up student debts along the way to your entry to the workforce, earning a fairly modest income and being exposed to higher effective marginal rates of tax whilst you chip away at your student debts will mean there will be little left for you to make ‘additional’ superannuation contributions. So there will be little, or not benefit in accessing those additional contributions to then go and borrow and buy a property, especially if your cash flow continues to be compromised by the higher student debt repayments.
Who will this benefit? Well most of all, higher income earners who don’t have student debts, and possibly high income migrants to Australia who have not yet had a ‘first home’ in Australia. They will be able to divert money into superannuation, then access it to help fund their new home.
So how many young first home buyers is this going to benefit? Not many. For those it can help, is it helpful? Not much. Will it seriously impact their long-term superannuation savings that would otherwise be available for decades to enjoy compound growth? Yes, absolutely.
And what of investors? Well negatively gearing is not being wound back, but investors (and poor quantity surveyors, many of whom are likely to find themselves redundant in coming months) will be significantly affected.
For years our office has been ‘watching’ what the ATO has been doing, and have pointed out to a few clients there is a reason that the ATO has provided a ‘separate box’ in the rental property schedule for ‘travel’ expenses. This was not to encourage claims for travel, but to be able to identify the cost of such travel, and to make it easier for them to identity that you had claimed $2500 for that recent interstate trip you made, and to issue an intimidating questionnaire about how much of the $2500 related to the property management and how much might have related to the week spent in holiday accommodation with the family. Rather than ‘educating’ taxpayers as to their rightful (apportioned) claim, the ATO has thrown up its hands and given up, and told the government that it would be much easier and better to simply remove all tax deductibility for any travel for residential properties (though, curiously, not for commercial property).
This has echoes of a previous government attempt to wind-back claims for work related self-education expenses – that is, selectively and arbitrarily removing the ability to claim legitimate costs against related income.
Of much greater concern and impact, is the removal of tax deductions for existing assets in a newly purchased investment property (ie from 10 May 2017). At this stage, it is unclear if the opportunity will remain for 'new residential' property.
As many people know (and many more didn’t), when an investor purchases an investment property they have been able to have a ‘quantity surveyor’ prepare a report as to the depreciable items in that property, such as an air conditioner, carpets and other items.
Now, of course, if you buy and install these now, they are not deductible, but subject to deductible depreciation claims over a number of years.
Whenever there is a change in ownership of the investment property – unlike before – these claims will not carry over to the purchaser.
Now, really, this creates an anomaly in the tax system. Without the ability to ‘extract’ the value of installed items, when those items are replaced the investor will effectively have two items embedded to their cost base in the property, although only one is ever installed and being used. So a major cash flow advantage is lost to property purchasers from today, and if anything this provides a relative greater incentive to investors to buy ‘existing’ / older properties, compared to newer, more highly renovated properties (a relative incentive, at least from a tax point of view).
And it won't help people who can't afford to live in their first property purchase. For instance, you might need to live and work in a location that you can't afford to buy a property in. To get into the market, some buy interstate, and to help fund their cash flow requirements use the quantity surveyor report to improve the tax effectiveness of their purchase. This door has just shut too, making it harder for first time property investors.
Over the decades quantity surveyors have built extensive businesses across Australia supporting this property/tax situation, and the rug has been pulled by the government with this budget and it will cause a lot of pain, for many. It’s like pink bats again, it’s like vehicle FBT changes again – an industry has been virtually wiped out overnight.