The 2017 Australian Federal Budget has been released. Let’s take a look at the key takeaways and how this may impact us:
Infrastructure was a key focus area for the 2017 Budget with commitments of $75 billion in additional funding to various projects over 10 years. Some of the key projects included:
- Western Sydney Airport, which will commence in late 2018
- Melbourne to Brisbane Inland Rail Project
- National Rail Program to improve the connections between our nation’s cities and regional areas
- Regional productivity commitment of $472 million
- $792 million to Perth’s Metronet
In short, a four-year university degree is set to become 7.5% more expensive over the next 4 years, and the income threshold at which HELP repayments will commence is set to be lowered to $42,000. After the recent HECS / HELP changes for Australian expats, it’s important that to recognise that these changes impact residents and expats going forward.
We will also see our Australian schools receive $1.7B over the next 4 years with up to $18.6B targeted by 2027. David Gonski AC will be chairing a further review on how funds should be distributed to the schools.
With housing affordability making the headlines in Australia on almost a daily basis, with blame being placed on everything ranging from foreign buyers, to negative gearing to smashed avocados, this was a key focus area for the 2017 Budget.
First, the Australian Government has designed a measure to encourage retirees to downsize their homes, by allowing those over 65 years of age to make a non-concessional contribution of up to A$300,000, providing the property was held for at least 10 years.
This could be an excellent boost for retirees to provide for their own living expenses and address a concern for many that most of their wealth at retirement is tied up in the family home.
The second measure introduced designed to address housing affordability is effectively a ‘Ghost Tax’, which means that foreign buyers of Australian property that don’t occupy the property or make them available for at least 6 months of the year or more will be charged an annual fee of at least $5,000.
We’ll assume that some research has gone into the fact that an annual fee of A$5,000 will be enough to encourage foreign buyers to rent out the property, although this would be a difficult measure to pinpoint this amount. What impact this has on availability of rental properties we will wait to see.
There are also two additional measures that will impact foreign buyers of Australian properties. First, a 50% cap on pre-approved foreign owners for new dwellings for 50 or more units. The second measure is an increase in the CGT withholding rate from 10% to 12.5% and reduction in the threshold from $2M to $750,000. This means that foreigners selling a property worth more than A$750,000, will be faced with this withholding tax.
Another key measure introduced is the First Home Buyer Saver Scheme. This allows first home buyers to make voluntary contributions into their Super Funds, up to a maximum of A$15,000 each per year to a total of A$30,000, which can be later withdrawn to cover (at least part of) their home deposit. This means that a couple can contribute up to A$30,000 per year up to a maximum limit of A$60,000 in total. It’s important to note that the contributions can be made from 1 July 2017 and withdrawals can not start until 1 July 2018.
This measure for first home buyers could prove helpful for some, however it’s important that they seek proper advice and understand the impact of deemed returns and how this could affect their long-term retirement savings.
A further measure introduced to improve the availability of rental properties is a 60% capital gains tax discount for those Australian residents investing in residential properties providing them for below market rent to lower income individuals and families.
Finally, it has been announced that foreign and temporary tax residents will no longer have access to the CGT main residence exemption. Grandfathering will remain on existing properties held prior to the Budget announcement until 30 June 2019, which could impact many of us. The finer details of this are yet to be released so we await further details to ascertain how this could be fairly implemented.
The Temporary Budget Repair Levy, which is currently 2% for those earning over A$180,000, will expire on 30 June 2017 as expected. This effectively means that the top marginal tax rate in Australia will be reduced from 49% to 47%, for the next two financial years. For those on the top tax rate in Australia, it could be a worthwhile strategy reviewing your current deduction strategies with your accountant and financial adviser.
Unfortunately, it’s not all good news with the Medicare Levy set to increase from 2.0% to 2.5% from 1 July 2019. The top marginal tax rate will therefore jump by 0.5% in the 2019/20 financial year.
It’s important to note for property investors, that travel expenses to inspect or maintain your investment properties will no longer be deductible. Unfortunately, this has been a case of a small percentage ruining it for the rest. Thankfully, negative gearing has been left alone in this 2017 Federal Budget.
Impact on Asset Classes
Let’s consider what impact the 2017 Australian Budget may have on the various asset classes in Australia.
- Shares: We may see a small uptick in the Australian stock market as a result of the Budget, however there it is unlikely to have a major impact either way. We may see the construction and infrastructure stocks be the biggest beneficiaries, while the banks are likely to be the biggest loses from this Budget.
- Property: Property prices may soften slightly as a result of the Budget, however the impact is unlikely to be immediate. We would expect that price growth in Melbourne and Sydney, particularly given recent performance, would slow over the coming years.
- Infrastructure: We would expect to see the sector perform well with further assets being privatised.
- Bonds: With 5 year Australian Government bond yields sitting at 2.02% and 10 year bond yields at 2.47%, it’s difficult to get too excited about bond returns in the short-term. The 2017 Budget is unlikely to have a significant impact on this asset class.
- Cash: There is nothing in the Budget to suggest that interest rates paid on cash and term deposits are going to start rising in the short term, so we would expect that rates of return on cash will remain subdued for some time.
- FX: While the Australian Budget will do little to impact the currency, the falling iron ore price and rising interest rates in the US are likely to see the A$ depreciating of the short to medium term.
Overall, the 2017 Australian Federal Budget has some key changes to be aware of, particularly for First Home Buyers, property investors and those with HELP/HECS debt to be repaid. It will in all likelihood lead to further job creation in Australia as well as essential new infrastructure in the country. We remain cautiously optimistic as we head into the second half of 2017.
To your financial success!
Jarrad Brown is an Australian-trained and qualified Fee-Based Financial Planner with Australian Expatriate Group, division of Global Financial Consultants Pte Ltd providing specialist financial advice and portfolio management services to international and local professionals in Singapore. Jarrad Brown is an Authorised Representative of Global Financial Consultants Pte Ltd – No: 200305462G | MAS License No: FA100035-3
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General Information Only: The information on this site is of a general nature only. It does not take into account your individual financial situation, objectives or needs. You should consider your own financial position and requirements before making a decision.
*Please note that Jarrad Brown is not a tax agent or accountant and none of the content outlined here should be taken as personal advice. You should consult your tax agent and financial adviser to review your current personal finances and financial goals to consider whether this strategy is appropriate for you.