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Federal Budget Aims for Stability

This year’s Budget has begun to focus on revenue, not just spending cuts.

It aims to contain our debt so we head back to surplus, though the assumptions behind this may prove optimistic. Our rising debt is due to spending the temporary commodity price boom on 8 sequential income tax cuts, lavish middle-class welfare, baby bonus, generous superannuation tax concessions and the Age Pension rise a few years ago.

However, our Govt debt is very low by international standards. The US has much more public debt – ours is less than half the UK’s, which has exceeded 40% of its income (GDP) for years. Investors are actually very happy to own Government debt in stable economies like ours. Despite steadily higher debt, it seems we no longer have the ‘debt and deficit crisis’ of 2013 and we’ll keep our AAA credit rating.

While interest rates are low, the government is borrowing to build some major infrastructure like Sydney’s 2nd airport and many other ventures around Australia. A few housing affordability measures have also been announced but probably to limited effect. The next 4 years offers $9 billion of spending measures with $2.2bn in health and $1.8bn for Gonski 2. Revenue measures create $17.4bn with the extra 0.5% Medicare raising $8.2bn in the last 2 years, $6.2bn from the Bank liabilities’ levy and 3.8bn from higher education reforms.

Major Banking Levy:  a levy of 0.06% from 1st July 2017 covers CBA, Westpac, ANZ, NAB and Macquarie Group – it will apply to loan facilities like corporate bonds, commercial paper, certificates of deposit, and Tier 2 capital instruments. This will raise $6.2 billion over the next 4 years to assist with budget repair.

Complaints – from 1st July 2018, a new one-stop shop (the Australian Financial Complaints Authority – AFCA) will resolve external financial services and superannuation disputes.  This free, fast and binding service replaces the Superannuation Complaints Tribunal and existing ombudsman schemes and is funded by that industry.

Foreign owners of unoccupied residential property or not genuinely available on the rental market for at least six months per year, will attract a new annual charge from Budget night. It is equivalent to the property’s relevant foreign investment application fee when they acquired it.

Retirees?

Superannuation – Extensive superannuation changes from last year’s Budget largely begin on 1st July 2017. In this Budget, the main superannuation change is that if you’re 65 or more, you can add up to $300,000 from your home sale proceeds to your super, exempt from super limits/caps. For a couple this is $600,000, a useful option if downsizing your home. This will apply to a principal place of residence held for at least 10 years and avoids the $1.6m super cap and $100,000 after-tax contribution limit.

Extensive superannuation changes from last year’s Budget largely begin on 1st July 2017.

Enhanced Residency Requirements for Pensioners – Residency requirements for Age Pension and Disability Support Pension (DSP) will be revised. From 1st July 2018, you must have 15 years continuous Australian residence for the Age Pension or DSP unless you have either:

  • 10 years continuous Australian residence, with 5 years of this during your working life (16 years of age to Age Pension age); or
  • 10 years continuous Australian residence, without having received an activity tested income support payment for a cumulative period of 5 years.

Existing exemptions for DSP applicants who acquire their disability in Australia will still apply.

Pensioner Concession Card – the Government will reinstate this card for pensioners who were no longer entitled to an Age Pension after the Pension assets test changes from 1st January 2017.

Energy Assistance Payment.  If you’re eligible for qualifying payments on 20th June 2017 and an Australian resident, you receive a one-off Energy Assistance Payment in 2016-17 of $75 for single recipients and $125 per couple. Qualifying payments include:

  • the Age Pension
  • Disability Support Pension
  • Parenting Payment Single
  • Veterans’ Service Pension, Income Support Supplement, Disability payments
  • War Widow(er)s Pension
  • Permanent impairment payments under the Military Rehabilitation and Compensation Act 2004 (including dependent partners) and the Safety, Rehabilitation and Compensation Act 1988.

Pre-retirees?

Downsizing exemption to superannuation caps  – from 1st July 2018, a person aged 65 and over can downsize their family home and add sale proceeds up to $300,000 per member into their super fund without breaching any of the current superannuation caps, work test and age test. This will apply to a principal place of residence held for at least 10 years.  Even if you have total super of $1.6 million or more, you can make an after-tax contribution with your house proceeds. This also avoids the $100,000 annual after-tax contribution limit applying after 1st July 2017.

Extensive superannuation changes from last year’s Budget largely begin on 1st July 2017.

In the working years?

First Home buyers can withdraw for use as a first home deposit, any voluntary concessional or non-concessional superannuation contributions of up to $15,000 p.a. made after 1st July 2017 with associated earnings. These withdrawable contributions must be within the existing caps and cannot exceed a total of $30,000 per person. Withdrawals of these contributions can be made from 1st July 2018. Concessional contributions and associated earnings will be taxed when withdrawn at your marginal tax rate, less a 30% offset. Both members of a couple can take advantage of this measure to buy their first home together, so up to $60,000 can be saved this way between them.

Increased Medicare levy – the Medicare levy will rise from 2% to 2½% of taxable income from 1st July 2019 to fully fund the National Disability Insurance Scheme (NDIS). Other tax rates linked to the top personal tax rate (like fringe benefits tax) will also be increased.

Medicare low-income thresholds for singles, families and seniors and pensioners will also rise from 2016-17 as follows:

  • Singles – rises to $21,655
  • Family – rises to $36,541 plus $3,356 for each dependent child or student
  • For single seniors and pensioners – rises to $34,244
  • For seniors and pensioners – rises to $47,670 plus $3,356 for each dependent child or student.

Family Tax benefits (Repealing Middle Class Welfare) – from 1st July 2018, a consistent 30 cents in the dollar income test taper will apply for Family Tax Benefit Part A families that have a household income above the Higher Income Free Area (now $94,316 p.a.). This will ensure higher income families have the same income test taper rates.

The Family Payment Reforms announced in the 2015/16 MYEFO to increase the maximum Family Tax Benefit (FTB) Part A rate from 2017/18 (a new families package) will not proceed.

The current Family Tax Benefit (FTB) payment rates will stay at their current levels from 1st July 2017 for 2 years. Indexation of the FTB payment rates will resume on 1st July 2019.

Child care rebate – upper income threshold – the Government will save $119.3 million over three years from 2018-19 by better targeting the Child Care Subsidy only to families with incomes below $350,000 p.a. (in 2017-18 terms). The upper income threshold of $350,000 p.a. will be indexed by CPI from 1st July 2018.

Higher education – student contributions through the Higher Education Loan Program (HELP) will rise by 7.5% (1.82% p.a. over four years from 2018), with commensurately reduced university funding under CGS.  Student contributions will rise for all Commonwealth supported students from 1st January 2018 regardless of when their studies began.

From 1st July 2018, the income threshold for HELP debt repayment will be $42,000 p.a., repaying 1% p.a. – to a maximum threshold of $119,882 with 10% repayment rate.

Travel expenses for residential rental property – from 1st July 2017, deductions for travel expenses related to inspecting, maintaining or collecting rent for a residential rental property will be disallowed. Investors can still obtain a tax deduction for expenses when engaging third parties like real estate agents for property management services.

Limit plant and equipment depreciation deductions – from 1st July 2017, plant and equipment depreciation deductions will be limited to outlays actually incurred by investors in residential real estate properties. These changes will apply prospectively, with existing investments grandfathered. Plant and equipment forming part of residential investment properties as of Budget Night (including contracts already entered into then (7:30pm AEST on 9th May 2017) will still obtain depreciation deductions until either they no longer own the asset, or it reaches the end of its effective life.

Investors who buy plant and equipment for their residential investment property after Budget night can claim a deduction over the effective life of the asset. Subsequent owners of a property won’t be able to claim deductions for plant and equipment bought by previous owners.

Liquid Assets Waiting Period – increasing self-reliance – this will increase from 13 to 26 weeks from 20th September 2018 where a claimant’s liquid assets are equal to or exceed $18,000 for singles without dependants or $36,000 for couples and singles with dependants.

Working Age Payments Reform  – a new JobSeeker Payment will absorb seven working age payments and allowances. For Newstart Allowance and Sickness Allowance recipients this transition to the new JobSeeker payment occurs on 20th March 2020. Its rate will be the same as Newstart Allowance and current mutual obligation exemptions for Sickness Allowance retained.

The Widow Allowance will be closed to new recipients from 1st January 2018 and will stop on 1st January 2022, when all remaining recipients reach Age Pension eligibility age. Widow Allowance recipients transferring to the Age Pension will receive a higher payment rate.

Partner Allowance has been closed to new recipients since 20th September 2003 and will also stop on 1st January 2022, when all remaining recipients will reach Age Pension eligibility age.

Widow B Pension has been closed to new recipients since 20th March 1997 and will cease on 20th March 2020 – recipients will transition to the Age Pension with unchanged payment rate.

The Wife Pension has been closed to new recipients since 1st July 1995 and will stop on 20th March 2020. Most recipients will transition to the Age Pension or Carer Payment at the same payment rate. Australian residents who do not qualify for these payments will transition to the new JobSeeker Payment. Transitional arrangements will ensure those who transfer to the JobSeeker Payment have their rates preserved but those under 55 must meet mutual obligation requirements.

Bereavement Allowance will be closed to new recipients from 20th March 2020 and be replaced by the new JobSeeker Payment. Existing recipients of Bereavement Allowance will not be impacted by this change. Newly bereaved people on the new JobSeeker Payment will receive a triple payment in the first fortnight and current mutual obligation exemptions will be retained.

A new more equitable participation framework applies from 20th September 2018 to align the participation requirements for recipients aged 30 to 49 with those for recipients under 30. Recipients aged 55 to 59 will only be able to meet up to half of their participation requirements through volunteering. Recipients aged between 60 and Age Pension age will have a new activity requirement of 10 hours per fortnight that can be met through volunteering.

Extending immediate deductibility for small businesses.   Small businesses can immediately deduct cost of eligible assets under $20,000 if first used or installed ready for use by 30th June 2018. Only a few assets are not eligible (like horticultural plants and in-house software).

Assets of $20,000 or more (which can’t be immediately deducted) can still be depreciated in the small business simplified depreciation pool (the pool) at 15% in the first income year and 30% each income year thereafter. The pool can also be immediately deducted if the balance is under $20,000 over this period (including existing pools).

The current ‘lock out’ laws for the simplified depreciation rules (preventing small businesses from re-entering the simplified depreciation regime for 5 years if they opt out) will still be suspended until 30th June 2018.

SMSF investors?

Downsizing exemption to superannuation caps  – from 1st July 2018, a person aged 65 and over can downsize their family home and add sale proceeds up to $300,000 per member into their super fund without breaching any of the current superannuation caps, work test and age test. This will apply to a principal place of residence held for at least 10 years. Even if you have total super of $1.6 million or more, you can make an after-tax contribution with your house proceeds. This also avoids the $100,000 annual after-tax contribution limit applying after 1st July 2017.

Extensive superannuation changes from last year’s Budget largely begin on 1st July 2017.

Limited recourse borrowing arrangements – from 1st July 2017, limited recourse borrowing (LRBA) will be included in a member’s total super balance and transfer balance cap ($1.6million).

The outstanding LRBA loan balance will now be included in a member’s annual total superannuation balance.  Principal and interest repayments on a LRBA from a member’s accumulation account will be a credit in their transfer balance account.

Non-arm’s length arrangements – from 1st July 2018, non-arm’s length income provisions applying to superannuation will ensure that normal commercial transaction expenses are included when evaluating the commercial basis of a transaction. This limits opportunities for members to use related party transactions on non- commercial terms to increase their superannuation savings.

What do we think?

Bank Levy

This levy on CBA, Westpac, ANZ, NAB and Macquarie Group applies to loan facilities like corporate bonds, commercial paper, certificates of deposit, and Tier 2 capital instruments. It is likely to be almost 5% of those five banks’ expected net profit for this year. The levy also has the effect of evening out competition between the big-4 and the smaller banks that were previously disadvantaged with lower borrowing power.

The levy impact might be passed onto customers, though doing this will reduce competitiveness against smaller providers who avoid the levy. Macquarie is somewhat shielded by its non-bank asset management earnings. The share price effect will gradually become clearer but our view on the banks is largely unchanged, though their share prices have fallen somewhat as this news is being digested.

Housing Affordability

We think the Budget measures will have minimal effect on Housing affordability. Indeed, one scenario with the $300,000 into super from downsizing involves the extra $600,000 per couple. This  might persuade some pre-retirees to buy a more expensive house, knowing they can put some of it back into super as needed later (subject to legislative risk).

The ability to save up to $30,000 via super for a first house could make saving a bit faster. But this advantage might also just be absorbed in higher prices as all the other first home buyer policies have done.

Though we don’t relish the change, some adjustment to negative gearing and capital gains tax is probably needed for much housing affordability impact.

How can we help?

If you have any questions or would like further clarification in regards to any of the above measures outlined in the 2017-18 Federal Budget, please feel free to give me a call to arrange a time to meet so that we can discuss your particular requirements in more detail.

If you would like to discuss the information in this article or your investment options with one of our wealth management professionals, get in touch today!

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Disclaimer: All information in this article is intended to be general in nature for discussion purposes only. So you should not rely on it and seek personalised professional advice before making any decision.