A Budget With A Few Nasty Jabs
It doesn’t matter if you’re the treasurer of the local footy club, or the Australian government. The moment you stand up and start talking numbers, people are already wondering how long until the tea and biscuits will be served.
That’s why budget night is as much about political theatre as it is about finances. Paul Keating was a master at it – probably the best ever – because he managed to make it entertaining; almost a blood sport.
Scott Morrison is no Paul Keating, and this budget isn’t controversial nor contentious. There aren’t any ‘knock-out’ blows (like a new Fringe Benefits Tax or Capital Gains Tax). If anything it is fiscally ordinary but politically savvy as it seems to undermine Labor’s traditional catchcry that the Liberal Party looks after rich folks at the expense of the working class. Chance of an early election anyone?
Side-stepping discussion about whether the assumptions in the budget about growth, employment, etc. are valid, here are six ways the budget will affect property investors:
1. No big changes
Despite all the huff and puff, negative gearing and the 50% capital gains tax exemption escaped unharmed.
2. No more visitation rights
Your ability to claim a tax deduction to travel to visit your investment property has gone the way of the dinosaurs. This will hurt those with interstate or overseas investment property the most, as now they have to fund the airfare, accommodation, etc. out of after-tax dollars. This may mean less travel to visit properties, and some downside effects to tourism as well. For instance, Gold Coast apartments have been regularly sold on the promise of getting a tax deductible trip to visit your investment, and while in town, you can pop into the theme parks for some fun.
3. Interest rates to rise
Expect home loan interest rates to rise because the banks will be slugged with a new levy, and there is no way they are going to take a hit to their bottom line and just absorb it. Based on past form, homeowners will be hit a little, but property investors will shoulder the majority of the burden. This will be dressed up as the banks doing their bit to prevent the property market from overheating. My guess is up to a 15 basis point interest rate increase for homeowners, and up to a 30 basis point increase for investors. If you’re thinking about fixing your interest rate then you might like to act sooner rather than later.
4. Developer doldrums
Developers can’t sell more than 50% of their stock to foreign buyers. This is unlikely to hurt a ‘mum and dad’ suburban developer, but it will impact those who build apartment blocks around town. I’m scratching my head about the timing of this given the forecast already in place about the glut of apartments coming online in Melbourne, Sydney and Brissie. Surely this will make the outcome worse, not better. Now might be a good time to think about selling any underperforming unit or apartment you own before developers start discounting their prices to move their stock.
5. Foreign focus
Foreign investors can’t vote, so they’re an easy target for the government to tap for some extra revenue. Foreign homeowners access to the principal place of residence CGT exemption is being phased out, plus they will have to pay a new annual levy if they leave their property vacant for more than six months each year. Of course, these adverse changes are on top of various State governments’ plans to ramp up stamp duty on foreign buyers. If we’re not careful, the foreign golden goose might get frightened off!
6. FHB Savings Plan
One of the big ticket announcements was a new scheme to incentivise and reward first home buyers for saving. While it was touted as a great way to ease the affordability burden, it won’t really do much as even a small increase in property prices and/or inflation will wipe out the entire benefit, and then some. For instance, in the example provided in the budget, Michelle, who earns $60,000 per annum would be $6,240 better off after three years than she would be without the scheme. But wait – over three years, here is all that property prices need to rise to totally wipe out that benefit: Sydney 0.72%; Melbourne 0.96%; Canberra 1%; Brisbane 1.3%; Perth 1.3%; Hobart 1.7%. As I said, while it makes for a good headline, there isn’t much substance to it.
There were some other measures announced, such as an incentive for those aged over 65 who want to downsize, and changes to the depreciation of plant and equipment, but the big ticket items that affect property investors have been mentioned above.
So, what do you think of the budget? Was it good, bad or something in between? What should have been there, but wasn’t – or vice versa?
Tell the world by leaving a comment below.
Comments
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I believe there are changes to what can be included in depreciation. This will effect the majority of investors, I am surprised you haven’t covered it (perhaps you were thinking about when the tea and biscuits were coming)
I found a good article that has attempted to cover the impact of this on investors – See http://www.mcgqs.com.au/blog/detailed-analysis-of-the-budget-changes-to-tax-depreciation-on-plant-and-equipment-budget2017/
The good news is it only affects properties bought from now but for future properties the impact is material.
Thanks for the comment Steve.
I did mention it very briefly at the end of the article, but I thought it to be pretty much a non-event. I might be wrong, and since you’ve pointed this out, I’ll make some more enquiries.
So, stand by…
– Steve
I think this will be a boost for Regional residential markets as retirees can now get some benefit from downsizing to lower cost areas – a couple can now park up to $600,000 in Super as a boost to relocating. Central Coast, Blue Mountains, South Coast likely to benefit from a decade long shift for baby boomers wanting to boost their otherwise lean super fund, and enjoy the ongoing tax benefits.
Bob! G’day! Are you well?
The regional rail link (if it ever goes ahead) will bring jobs (and money) to regional areas during construction, and possibly freight / logistics jobs once complete.
As for retirees, I’m not so sure. I would have thought most want to live near family, especially grand kids, rather than moving for some savings.
– Steve
Depreciation changes, were there any, heard there might be?
BTW, love your work Steve!
Hey BK.
Yes, there were but I didn’t think they were game changers when I read them.
I might be wrong though, so I’ll do some more research on it and report back given others seem alarmed.
Remember that a budget announcement is not policy, and the way the law is written is often different to what was announced.
– Steve
Hi Steve, Great summary!
Correct me if i am wrong, but if interest rates rise in the current borrowing market surely that would put too much pressure on a fair chunk of the current loan holding community. It would seem that this would encourage distress selling. However, this coupled with ‘Developer Doldrums’ may be the governments way to soften the market and help prevent the distressed selling.
As i understand it, the government wants to force slow step changes to help normalise the property market and they hope to do this by targeting foreign investors
Thanks z3252164,
Yeah, you’re right. Debt levels are already at record highs, and many borrowers are apparently close to mortgage stress as it is. Every interest rate increase will tip some borrowers over the line and they will need to sell, but I don’t think it will be substantial at this stage.
The government / banks will probably target investors more than homeowners as there is little bad PR that will happen if an investor is forced to sell, but lots if Mr & Mrs average homeowner are.
The government needs a secure and profitable banking system more than it needs property investors. Or so it thinks, because a rush of investors selling could be the spark that ignites a broader property collapse – if such a thing is possible in Australia.
– Steve
The bank taxes will be funded by it’s customers and so can be called as an indirect tax on people using big banks. With poor rental yields and higher interest rates on investor loans housing will not be investor friendly moving forward. Property prices are stabilising and for an investor to make substantial gains would have to wait till next boom which could be potentially a decade ahead. Increased restrictions on immigration and foreign buyers would mean lesser demand for new construction and only growth will be based on increased demand from domestic market. First home buyers are not better off either. The stupid grants earlier helped only to overheat the market and bad idea on part of Govt to meddle with market forces. 300k allowance for people to downsize is not a great incentive especially for people in Sydney and Melbourne. Could have been a percentage based on difference of sold price and purchase price of the new downsized property.
Thanks for making your comment Satish.
As I read recently, increasing government grants are a demand solution to a (property) supply problem. This makes them less effective.
– Steve
Hi Steve. Long time mate. I always enjoy reading your updates. Are you back home in Melbourne yet or still practicing your American accent?
LOL Adam. Y’all know I don’t have a US accent , right?
I’m back at the beginning of July. House over here has sold and the moving company is coming on May 29. Looking forward to coming home and getting ready for Mega Conference in September.
See ya,
– Steve
I thought there were some depreciation changes
Hey there,
You’re not related to the purple wiggle are you? ;-)
Yes, there was a change announced that I largely glossed over because I thought it was peanuts in the bigger scheme of things. I might be wrong though, so I’ll take a closer look at it and report back soon.
Take care,
– Steve
Hi Steve,
Thanks for the summary.
Just confirming for the No Visitation Rights piece are the costs associated with travel Pre-tax or rather now post-tax please?
Yeah, you’re right. Let me fix that up…
It should say that you need to pay for the trip in after tax dollars (because you don’t get a tax deduction).
Good pick up.
– Steve
What would happen if contract for purchase specified each single item on for example stove $400, air conditioning $2000. That way you are purchasing every item yourself even if it secondhand. I wonder if that would be a way around the new legislation. What do you think?
Ahhhhh, you have hit on why I didn’t think it was a big issue Steve.
The easy fix to the announcement (as I saw it) was for the Purchase & Sale Agreement (PSA) to simply say that the plant & equipment, fixtures & fittings, chattels, etc. were being acquired at fair value as determined by a qualified quantity surveyor. This would allow the purchaser to ‘buy’ the items and be able to depreciate them, albeit they would need a QS report to justify it. This would cause a boom in the workload of quantity surveyors, but I doubt they’d mind. Otherwise, the PSA could specify the price (maybe written down value per an attached depreciation schedule) the items were being acquired at.
– Steve
I would have considered the changes to Plant/Equipment depreciation as a #1. Big Change:
“for properties bought after today, the Government will also limit plant and equipment depreciation deductions to only those expenses directly incurred by investors.”
It’s no change if you don’t plan on buying any further non-new properties, but for people settling a non-new property from today, they can’t depreciate Plant & Equipment, which is a big slug to people relying on the tax deduction. The only way to get the depreciation is by buying new, or buying the new equipment for existing properties, AFAIK.
Hey Tim,
Thanks for making your comment.
Can we agree that they key matter is defining ‘directly incurred’, and that at this time we don’t know?
“The only way to get the depreciation is by buying new, or buying the new equipment for existing properties, AFAIK.”
I don’t agree with the quoted comment just now. While it could be right in the worst case scenario, it seems a bit premature to make that conclusion.
– Steve
Looked much more than a pre-election budget than the first budget after an election. Best comment on ABC TV was that this is the 6th budget in a row that predicts a surplus in 4 years time.
Hi Robert,
“…this is the 6th budget in a row that predicts a surplus in 4 years time.”
LOL! Goes to show voters have a short memory my friend, shor-shor-short memory!
I think after the train wreck of the Abbott/Hockey budget a few years back the Libs are finally learning that it is unwise to poke the electoral bear.
Thanks for making your comment.
– Steve
I personally feel the bank won’t raise their rates and they may cut the shareholders return on their invenstments, i mean like if the official case rate was to rise even 25 basis points that would push so many more owner occupied families to the very edge and could very well cause some to default, that many families are so close to the edge of the cliff that even a gust of wind 💨 such as 15 basis points could push them off it… please banks consider this before rising, heaven forbid your precious profit take a little hit…..
I hope you’re right Sam, but the banks caring more for their customers than their shareholders would be, frankly, unprecedented in the modern age.
– Steve
The idea of using the salary sacrifice fund within super is a good one, as it encourages a habit to develop whilst not touching standard employer contributions. The saver also benefits from earnings made on the money whilst in their super (I presume) and if they never call on the money then it is in their superannuation balance for many years to come earning compound interest. I have not heard if there is a use by date on the money after which it stays in your super but that might be a good catch too.
Hi Richard C,
It certainly is different. I don’t like it though because superannuation is a long term retirement vehicle, not a short term savings vehicle. You wait… people are going to contribute to it and then decide they need the money for some other urgent non-housing need only to be told they can’t access it.
A better scheme would have been to create a government bank to fund community housing projects that is funded by the future fund and the savings of first home buyers (under the scheme announced).
– Steve
Hi Steve, my wife & I are lowly Adelaide investors. We live 40km South of Adelaide, while our rental properties are 40km North of the big smoke. On average we go out to service our investments once a month, mowing lawns, doing gardens & any small jobs that need seeing to,which makes a 160km round trip. Does the ‘No Visitation rights’ now mean we can’t claim mileage & lawn mower costs against our properties?
I have an English Brother-in-law who has done very well from rental investments over the years, who has a great throw away line, when it comes to politicians & governments sticking their nose where it is not welcome or needed. It goes like this, “I will vote for the party who will do nothing for me & just leave me alone”.
In relation to No More Visitation Rights ,can you tell me when this comes into effect please .
the travel stuff yet another blow for us regional-based investors with properties no closer than 300km away. i’m done with the policy hostility and taking my next purchases to the uk. not perfect there, but the mood here towards investors here are killing our domestic investment plans – and they still allow travel deductions…!!
I love how you pointed out Steve the tiny %’s that house prices would have to rise to wipe out the benefits of the new FHB plan!
You’re a great writer. Thanks for the article.
Jane
Hi Steve,
Property Apprentice Ben Albani here.
A lot has been said about the governments super saver program for FHB and I agree looking at a pure dollar value add incentive it makes very little impact.
However I think what people are failing to see is the deeper value and that is forced savings.
I would question, how many deposits are lost to things like “Jetstar fly return to Phuket for $99.”.
Once the flight add-ons, accommodation, spending money and shopping is factored in then the $99 flights are really costing $5,000 and a large chunk of post tax savings.
Yes you can argue they can put it into another account with no card, give it to parents to hold.etc but regardless it still makes it far simpler to access and is a figure that can be easily tracked.
I don’t know the rules yet around how exactly this will work.
I would hope that the money cannot be accessed until a contract of sale has been signed.
I would also hope the money can only be invested into cash assets as to not lose everything in a market crash.
All that being the case then I actually like it. Your not going to get a better return on your money whilst saving than a 15% tax break thats for sure.