HOW THE FEDERAL BUDGET AFFECTS FIRST HOME BUYERS AND INVESTORS

Last night the government announced its budget for 2017-18. The changes are most likely to affect foreign investors, first home buyers, home downsizers, banking customers and Medicare levy payers.

HOUSING AFFORDABILITY

As one of several housing affordability measures, the government tried to address housing affordability for low to mid income earners by making it easier to save for a deposit.

FIRST HOME SUPER SAVER SCHEME

First home buyers will be able to set aside voluntary pre-tax contributions (salary sacrifice) to their superannuation account as savings for their home deposit. The maximum contributions that can be set aside for a deposit are limited to $15,000 per annum, and is capped at $30,000 per person in total.

EXAMPLE

What does this mean for a couple who earn $70,000 per annum each?

Each member can contribute $30,000 across two years, making a combined total of $60,000. This is taxed at a lower rate of just 15%, as opposed to the marginal rate of 34.5% (including the Medicare Levy).

What it all boils down to is that if a couple earned $60,000 and paid income tax on the money at 34.5%, they would be left with $39,300 after paying tax of $20,700.

However, if they salary sacrificed and withdrew the same $60,000 from superannuation and cashed it out under the proposed changes, they will only pay $12,060 in tax. This is a tax saving of $8,640 – which will go some way towards saving for a first home deposit, but probably not enough.

It is important to note that existing annual super contributions caps will remain in place. So if you are 49 or over you can contribute up to $35,000 in total per annum (which includes both what work pays you, and what you elect to salary sacrifice). If you are under 49 then you are limited to $30,000. Next year this will drop to just $25,000 for everyone, irrespective of age.

BALANCING THE BUDGET

The 2017-18 budget will be $28.7 B in deficit, it’s expected to be an improvement on the $37 B actual deficit last year. The government has pledged to bring the federal budget out of deficit by 2021, as has already targeted investors, large banks & Medicare levy payers.

BANKS TO PAY LEVIES

A bank levy is a thinly veiled grab for money. After all, how many tax payers sympathize with the big banks?

As a result, the NAB, CBA, ANZ, Westpac and Macquarie banks will be taxed on loan facilities such as corporate bonds, commercial paper, tier 2 capital and certificates of deposit.

No one knows exactly what ripple effect this will have as banks try to balance the costs. However, one thing is certain, which is the buck will ultimately be passed onto taxpayers.

This will most likely happen in one of three ways;

– Lower returns on deposit accounts as banks try to pinch pennies.

– Lower dividend returns to investors, including superannuation accounts and mum and dad investors.

– Higher interest rates on credit cards and loans.

So property investors may be hit from multiple fronts and see their cash flow affected.

MEDICARE LEVY INCREASED

The medicare levy has been increased from 2% to 2.5%. This will affect a large part of the general population as well as property investors.

LOCAL PROPERTY INVESTORS

Investors will see changes to depreciation rules. They will no longer be able to claim depreciation on items that were installed before they bought the property. Depreciation will only be possible for items which they have installed since purchasing the property.

OVERSEAS PROPERTY INVESTORS

Foreign property buyers will receive penalties for leaving properties vacant and will be slugged with higher capital gains tax rates.

Foreign owners of residential properties which are not occupied or genuinely available on the rental market for at least 6 months a year will be charged an annual levy.

Foreign and temporary tax residents will be denied access to capital gains tax (CGT) exemptions on their main residence effective on purchases made from July 9, 2017, onward. In addition, the CGT rate will be increased from 10% to 12.5 % from July 1, 2017, for foreign property owners.

PRESERVING THE NEST EGG

In an effort to preserve the wealth of those in retirement, the government is giving a helping hand to those who are downsizing their home.

Those who are 65 or over, and have lived in their family home for 10 years or more can divert the profit from the sale of their home into superannuation at a 0% tax rate. Each member of a couple can divert up to $300,000 tax-free into their superannuation account.

EXAMPLE

Harry and Sally own their house outright. They decide to downsize, selling the house for $2 M net of all costs. They buy a smaller home for $1.4 M net, leaving them with $600,000 in cash.

Harry and Sally can each put $300,000 into their superannuation accounts and pay 0% tax on the profit made from the sale of their home.

This $300,000 contribution does not count towards the lifetime cap of $1.6m, however, all other standard rules apply. The sale can have implications for their Age Pension and Centrelink planning, which are not covered in this example.

CLOSING THOUGHTS

All up this was a very carefully constructed budget. I feel it was delivered as a ploy to try and win the next election. Although there are some headline-grabbing additions, I think that the budget has been carefully tweaked to give with one hand and take with another.

If you are worried about the implications for your home buying or investing journey then please reach out to us.

If you need help crunching the numbers on your tax and superannuation position then I recommend contacting OnePath Accountants.