The last few months in the lead up to the Federal Budget announces last week was a nervous time for many in the property industry. There were repeated calls for big changes to investor taxation benefits, all in the name of housing affordability. The Budget was supposed to have been termed a “housing budget”, but as it turned out there weren’t that many major housing announcements.
It was one of the strangest budgets I have ever seen from a Liberal government. In fact it looked like a textbook Labor budget – spend up big, add a few taxes and whack big business.
The Treasurer announced new spending on infrastructure, increased the Medicare Levy (increased tax) and smacked the big four banks with a carefully targeted levy on liabilities, which chiefly are its deposits.
Bottom line is – The Liberals have put up this type of budget because it’s the one they know they can get past Labor in the Senate. Can you imagine the opposition complaining about the Medicare program being guaranteed new funding, billions of new infrastructure spending and tapping the big banks for a few billion more?
Let’s have a look at the major components relative to the property investing sector.
Bank Levy – The new bank levy is expected to raise $6BN or so over the next 4 years. This is meant to come directly from the bank’s hip pockets, and we all know they can afford it with the billions they are making. However the bank’s ultimate responsibility is not to its customers, but to its shareholders. No matter that the government is likely pushing hard behind the scenes you can firmly expect that the extra cost to the banks will be passed on to you. That means increased interest rates.
Negative Gearing – Despite all the hype, the Government stuck to its guns and allowed no changes to the taxation incentive known as negative gearing. They clearly recognized that this is not what is responsible for the run up in prices in recent years. Also, it helps provide rental housing and investors can grow their wealth over time, meaning less reliance on pension payments in the future. I expect that this white noise will continue and if Labor is elected then changes will be made.
Capital Gains Tax (CGT) – currently if you own your property for more than 12 months, you get a 50% deduction on the amount of CGT you would pay on sale. Labor wanted to reduce this to a 25% reduction. Why they thought this would help housing affordability escapes me. Though I do think there is a case for encouraging investors to hold on for longer by delaying how long the holding period is before receiving the discount. That assumes of course that we must have a CGT – New Zealand doesn’t.
Foreign Investors – have been attacked, no other word for it. They are an easy target since they don’t vote and are easy to blame for high house prices. As of budget night, foreigners will pay a tax for leaving their property vacant, however this is not going to affect the estimated 300,000 vacant homes existing. Foreigners will only be able to buy 50% of any new development, rather than up to 100%. This limit is really window dressing because for the last two years banks have refused to acknowledge any more than 20% of a projects sales to foreigners when calculating pre-sales required to trigger funding. This has been because of the increased risk of foreign buyers not settling on completion. Most developers have already been focusing their projects on owner occupiers. Foreign investors also face an increase in withholding tax from 10% to 12.5% and the threshold for which this is calculated will drop from $2M to just $750,000. That could mean a lot more paperwork for local property owners who sell to foreigners and more tax on sale for the overseas owners. I don’t think this will go down well overseas with buyers getting the message loud and clear at both State and now Federal level that you are no longer encouraged to invest in Australian real estate. I think that’s a mistake, since foreign buyers are needed to get new housing projects funded. And more supply will help solve the housing affordability issue.
First Home Buyers – will be offered the opportunity to salary sacrifice in to their super accounts to save a bit on tax while they save for their home deposits. Again, more window dressing. Assume the saver was on a salary of $60,000 and saved the maximum $15,000 for three years – the saver would only be about $6,000 better off and that is not likely to keep up with the pace of home price increases.
Housing Initiatives – The Government announcing a National housing finance corporation to be set up to offer community providers low cost finance to produce affordable housing. Great initiative – however why not set up a development bank, standing in the market, providing the same finance to developers who want to increase the supply of new housing and are currently denied by the squeeze on funding from the big banks? The government also intends to throw $1BN to local governments who want to develop new homes and apartment blocks. I think this funding much better directed to private enterprise whose business it is to build more housing.
Other Deductions – if you have interstate or regional property, best hop on to a plane and inspect for July 1, as after that time you won’t be able to deduct the cost of the inspection trip or to maintain or collect rent. Also changes to depreciation rates of plant & equipment could mean buyers of existing property won’t be able to claim certain depreciation deductions – do check with your accountant on this for more complete information.
So, some good news, some not so good.
What is important to understand that the goalposts in the property investing game are regularly being moved.
We all need to be aware of these changes and adjust our aim to we can keep kicking goals.