The Federal Government has unveiled its 2017-18 national Budget, with first time buyers and small business owners the big winners, and foreign workers, Australia’s major banks and middle to high income earners the biggest losers.
Last year, the Federal Government’s national Budget gave us the usual ‘show bag’ of fringe-based changes that seemed to affect few people.
This year however, the story was a little different.
According to Treasurer Scott Morrison, this year’s Budget was “honest”.
“This is an honest Budget. It does not pretend to do things with money we do not have,” Mr Morrison said.
“This is a Budget and a plan that can be supported.”
And while some members of the community will likely support the Government’s 2017-18 Budget, others – namely higher income earners and foreign workers – may find it hard to do so.
Below are some of the highlights from the 2017-18 Federal Budget:
As promised, negative gearing was largely kept off the agenda.
But while there were no material changes to this investment policy, the Treasurer made it clear that certain tax advantages given to these property investors would be restricted.
From today onwards, negatively geared landlords will no longer be able to claim tax deductions for travel expenses related to owning and renting an investment property.
In addition, the rules around depreciation deductions for plant and equipment items have been tightened. As a result, investors will only be able to claim deductions on plant and equipment items (such as washing machines and ceiling fans) that they actually purchased.
Meanwhile, investors looking to purchase ‘affordable housing’ will be rewarded with various tax incentives.
In his address, Mr Morrison said those investors who purchase ‘qualified affordable housing’ will receive a 60% Capital Gains Tax discount – up from 50%.
First Home Buyers
But it wasn’t just property investors who were targeted in this year’s Budget. From 1 July, first home buyers will be able to salary sacrifice a portion of their income into their superannuation account in order to save a property deposit.
Savers will be able to salary sacrifice from their pre-tax income extra amounts up to $15,000 a year over the compulsory superannuation contribution (up to a maximum of $30,000) to fund a new home purchase. With all additional contributions taxed at just 15% and subject to the combined annual limit of $25,000 for both employer and pre-tax contributions.
Then, from 1 July 2018, first home buyers will be able to withdraw the cash they have saved as well as any earnings on that money. All withdrawals will be taxed at 30% below the marginal tax rate.
Mr Morrison said the new scheme would accelerate savings for first home buyers and act in a far more effective manner than the everyday savings account.
Downsizers were also addressed in the latest Budget. From 1 July 2018, those aged 65 and over who are looking to downsize, will now be able to make a non-concessional contribution of up to $300,000 from the sale of their principal place of residence into their superannuation fund. This would mean that a couple could contribute up to $600,000 extra to super.
This additional contribution would not be subject to the work test, other age limits or the non-concessional contribution limits for those with over $1.6 million in super.
The policy change is expected to encourage older Australians to downsize (and thus free up more properties), but it will only apply to those who have lived in their principal place of residence for more than 10 years.
With all of these changes, the rules surrounding superannuation have become even more complex. As such, there has never been a more important time to seek out the services of a professional adviser.
Housing and cost of living
In a bid to unlock even more property and create more supply for potential buyers, the Government also said it would focus on building more homes over the coming years.
Specifically, the Treasurer said $1 billion would be spent on the creation of a National Housing Infrastructure Facility which would hopefully address some of the chokepoints that are impeding housing development in certain areas.
Mr Morrison said the Government is working to unlock un-used Defence land in Melbourne in order to erect more properties in the area. In addition, Mr Morrison said the Government would seek to deliver “tens of thousands” of new homes in western Sydney as part of the “Western Sydney city deal”.
In addition, the Government announced its plans to fund certain rail and air projects. Notably, the Federal Government said it would deliver $1.2 billion to Western Australia in order to fund the Metronet project and expand the Perth rail system.
But while the new funding was considered a win for Western Australia, the state’s Treasurer, Ben Wyatt, said Western Australia weren’t going to be celebrating any time soon.
Soon after the Budget was released, Mr Wyatt said he was disappointed to be left with a $417 million black hole in education funding and a $100 million health cut. He also said the tax hike delivered through the increase in the Medicare Levy would negatively impact the cost of living for many West Australians.
Foreign property investors were among the biggest losers on Budget night, with the Federal Government announcing that all new developments will be subject to a 50% cap on foreign investment approvals.
This measure, Mr Morrison said, will help safeguard the opportunity for Australian buyers to purchase.
In addition, capital gains tax rules will be tightened for foreign investors as they will no longer be able to access the ‘main residence’ exemption. Furthermore, the capital gains tax withholding rate for foreign tax residents will be increased from 10% to 12.5%, while the capital gains tax threshold for these property owners will be reduced from $2 million to $750,000.
Finally, foreign investors who leave their Australian-based property vacant for at least six months of the year, will incur a ‘ghost tax’. This ghost tax is an annual charge equal to their foreign investment application fee.
It is expected that all the changes imposed upon foreign investors will help bring in more than $580 million over the next four years.
Housing aside, small business owners were afforded some additional incentives. In last year’s Budget, the Government announced that small businesses with a turnover of anywhere up to $10 million will pay a reduced company tax rate of 27.5%.
This year, the Government continued its support of small business owners, with the Treasurer announcing that more tax breaks and red tape reductions were on the cards to help these businesses recruit and retain employees.
In addition, the Federal Government announced that the $20,000 instant asset tax write-off introduced in the 2016 Budget, would be extended for another year and opened to businesses with an annual turnover of up to $10 million.
Australia’s major banks
In a surprise move, the Federal Government announced that the four major banks and Macquarie will face a new levy that is expected to deliver revenue of $6.2 billion over the next four years.
Mr Morrison labelled the new levy as ‘fair’ and said it would help even up the playing field for Australia’s smaller lenders.
In addition to the new levy placed upon Australia’s major banks, the Federal Government announced it would increase the Medicare Levy from 2% to 2.5%.
The Medicare levy increase, which won’t formally come into play until after the next election, is expected to reap $3.55billion in 2019-20 and $4.25bilion in 2020-21.
In a bid to protect low income earners from the increased Medicare Levy, Mr Morrison said the income thresholds (below which the Levy is not charged) would rise to $21,655 for singles, $36,541 for families, plus $3,356 for each dependent child or student.
At the other end of the spectrum, middle to high income earners are expected to be hundreds (if not thousands) of dollars worse off each year.
Under the proposed Medicare Levy increase, someone earning $100,000 a year, would be required to pay an additional $500 a year in Medicare Levy for a total of $2,500. Someone earning $150,000 a year would be required to pay an additional $750, while those earning $200,000 would be required to pay $1,000 more.
But while the increased Medicare Levy is expected to affect most Australians, there is some light at the end of the tunnel. During his Budget presentation, Mr Morrison also announced that the Medicare rebate freeze will be lifted and doctors will soon be incentivised to bulk bill.
Finally, in a bid to create more job opportunities for Australians, the Federal Government announced that they will introduce a new levy on businesses that employ foreign workers.
From March next year, the levy on foreign workers on certain skilled visas will go towards a new Skilled Australians Fund. Small business will have to pay $1,200 per year for a foreign worker, along with a one-off $3,000 payment. Larger businesses would pay $1,800 a year per worker, along with a one-off payment of $5,000.
This announcement comes hot on the heels of the Government’s decision to abolish the 457 visa.
The Government’s 2017-18 Budget was undoubtedly an interesting one.
While the Government has sought to try and address the ever growing issue of housing affordability, their measures are likely to have no material impact on the problem.
Further, various changes, like the adjustment to the Medicare Levy, will only serve to increase the cost of living for many Australians, further exacerbating the issues we already face in this area.
That said, the Government no doubt believes this was a fair Budget, and one that seeks to deliver to the sectors in greatest need.
If you have any questions, or would like to talk about how this might impact your situation, please get in touch with us.