All the fuss of the 2017-18 Federal Budget was targeted around the big banks, their large profits and the levies which the government intends to impose on them – which we all know will be passed onto the consumer. However, the Budget also included some proposed changes that might impact you personally.
This blog provides a summary of the key changes announced in the 2017 Budget. Please note that each of these ‘proposals’ will need to be approved by Parliament to become law – so there’s a chance that some of these may not materialise.
Reduction to investment property tax deductions
From 1 July 2017, you will no longer be able to claim tax deductions for travel expenses related to inspecting, maintaining or collecting rent. Additionally, the rules around claiming depreciation will be limited so that deductions for plant and equipment (i.e. fixtures and fittings) will only be allowed where an expense has actually been incurred by you. However, you will still be able to claim depreciation for any investment properties purchased before 9 May 2017.
This will make new-build properties less attractive from an investment perspective (as these assets used to deliver large depreciation tax savings which were heavily marketed as ‘positives’ by developers). This is actually good news as these types of properties rarely make good investments (why? See this blog). The impact of this new rule on investment-grade property (which is what our clients invest in), will be limited. We have never relied upon any projected depreciation tax savings from investing in property when providing investment advice to our clients.
Increase in Medicare Levy
From 1 July 2019, the ATO will increase the Medical Levy from 2% to 2.5% of taxable income, to fully fund the National Disability Insurance Scheme. On an average salary of $78,800, the levy increase will result in $394 in additional tax.
Temporary budget repair levy ceases
The 2% tax (or ‘levy’ as the government coins the term) imposed on high income earners (> $180k p.a.) has not been extended and will cease from 1 July 2017. Therefore, the top marginal tax rate for the 2017/18 year has reduced to 47% (from 49%).
First Home Super Saver scheme
This proposal is meant to assist first home buyers in reaching their Australian dream. Taxpayers will be able to salary sacrifice part of their salary into their superannuation fund which can then be withdrawn for a first home deposit. Voluntary contributions of up to $15,000 per year, up to $30,000 in total (per person) can be made from 1 July 2017. Withdrawals of these contributions (plus a specified rate of earnings), to fund a first home deposit will be allowed from 1 July 2018 onwards.
This is a more tax-effective way to save for a deposit – but doesn’t eradicate the risk of the market growing faster than an individual’s ability to save a deposit. Parents providing a Family Guarantee is still the most successful way to help kids get into the property market – as described in this blog.
Superannuation contribution cap exemption for downsizers
People over 65 who downsize their home will be able to contribute up to $300,000 of the proceeds of the sale into superannuation. This contribution will be treated separately to the non-concessional contribution cap. This is a positive change although probably has very limited application and when we develop an investment strategy, we don’t like to rely on crystallising cash/equity from a home downsize to fund retirement. If it happens, it’s icing on the cake.
Extending the instant asset write-off
The Treasurer announced that the instant asset write-off available to small business entities for eligible assets costing less than $20,000 will be extended for a further 12 months to 30 June 2018. To be eligible for write-off under the higher threshold, the asset must be first used or installed ready for use by 30 June 2018. From 1 July 2018, the immediate deductibility threshold and the balance at which the pool can be immediately deducted will revert to $1,000.
Higher education reforms
New HELP debt repayment thresholds will come into force from 1 July 2018. This will apply to all current and future HELP debtors impacting the timing and amount of their repayments. The minimum income repayment threshold will be $42,000 from 1 July 2018, with a one per cent repayment rate. At the maximum threshold of $119,882, a repayment rate of 10 per cent will apply.
Overall, minimum impact
Overall, none of the above proposed changes will have any significant impact on our clients – no games changers here. On a positive note, we feel the depreciation changes will force more investors to focus on the capital growth prospects of a property (and not get dazzled by short-term tax savings). That is a very positive step forward.
Of course, there might be smaller opportunities to optimise your finances. If you have any questions about the above, please do not hesitate to reach out to us.
