How the 2017-18 Federal Budget affects investors

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How the 2017-18 Federal Budget affects investors

Federal Budget

On Tuesday night the Treasurer, Scott Morrison, handed down the 2017/18 Federal Budget. The Government noted the Budget is about ‘fairness’, boosting economic growth and helping households; which it hopes will lift consumer and business sentiment. Not too mention hopefully giving a much-needed boost to the Coalition’s re-election chances. Performance Property Advisory (PPA) will focus on the issues more relevant to the property sector.

Residential

  • No major changes to negative gearing however, the cost of travel to view your property will no longer be a deduction from 1 July 2017; and depreciation deductions for plant and equipment will be limited to actual outlays on property and equipment. At this stage there is only limited amount of information available, it does appear that quantity surveyor depreciation reports will be of limited use and property investors will only be able to claim depreciation deductions on items of plant and equipment if they either:
    • purchased the asset directly (i.e. add a new dishwasher) or;
    • bought a brand-new property.
  • If you invest in “affordable” housing the capital gain discount will be increased to 60% from the current 50%. Obviously this is a measure to attract private investment into this sector and improve supply levels. Managed Investment Trusts (MIT’s) will be able to invest in affordable housing providing the properties are kept for ten years.
  • First Home Buyers – From July 1st, 2017 if you are a looking to buy your first home, you can salary sacrifice up to $15,000 per year or a lifetime sacrifice of $30,000 of your employment income into superannuation to assist you to buy a home. This will be taxed at 15% and this can be withdrawn at any time after 1 July 2018 for the purpose of purchasing your first home to live in. This plus the earnings on the amounts contributed will be taxed on withdrawal at your marginal tax rate less 30%. We had some concerns around using super but this appears to be a constructive policy.
  • Downsizer’s – If you are over 65 and sell the family home after 1 July 2018, provided it has been the family home for at least 10 years, up to $300,000 of the sale proceeds can be contributed to your super fund as a non concessional contribution (currently you can’t contribute at all if you don’t meet the works test). This has a positive impact for a lower tax rate on investment income and for possible pension recipients, and is exempt from the age test, work test, and the 1.6mill balance test. This could be a good incentive to increase supply levels of established housing in our inner and middle ring suburbs and take some heat out of the market.
  • Foreign Investment – Removal of the main residence exemption for foreign and temporary residents from 7.30pm on 9 May 2017 with existing properties grandfathered until 30 June 2019.
  • From 1st July 2017, the Capital Gains Tax withholding rate on sales of Australian real property will be increased from 10% to 12.5% with the value of the threshold decreasing from $2m to $750,000

  • Foreign demand will be reduced by the reintroduction of the 50% cap on foreign ownership in new developments, which was abolished by the Rudd government.

  • Foreign investors who have vacant residential property for at least six months of year will be liable to an annual levy of least $5,000.

Coupled with State Land Tax & Stamp Duty surcharges as well as Victoria’s very own vacancy tax for foreign investor’s we expect to see a slow down in foreign demand for our residential property.

Industrial

The emphasis on infrastructure investment in the budget is positive for long-term economic growth in non-residential property, particularly the industrial sector. With this in mind, industrial property should to be a winner

  • A range of initiatives were announced providing $10bn in infrastructure funding and financing over the next ten years. If enacted, these should make the industrial/logistics market and the commercial property sector likely to benefit most from the Budget.
  • Major announcements included $5.3bn for the Western Sydney Airport Corporation and $8.4bn for the Melbourne to Brisbane Inland Railway.
  • The Western Sydney Airport is expected to begin next year and the development is forecast to generate 20,000 direct and indirect jobs by the 2030s. This should drive commercial property development in Western Sydney with industrial property in particular likely to be a winner.
  • The Melbourne to Brisbane Inland Rail is likely to be positive for industrial property in Melbourne and Brisbane as well as areas along the route such as Toowoomba, Moree, Parkes and Albury. The project is expected to generate 18,000 jobs at its peak.

Commercial

There is expected to be limited impact on the office market

  • The banking sector is a major space user in office markets around Australia. One Budget proposal likely to pass through the Senate without too much fuss is the $6.2bn levy on the big four plus Macquarie. The cost of the levy will probably be passed on in some form to customers and investors and may, at the margin, inhibit space use but the impact should be minimal.
  • Office tenants associated with infrastructure development, such as engineers, accountants, lawyers and tech, are likely to benefit from the Budget. Whilst tenants which utilise workers from overseas, such as the tech sector, may suffer through the proposed tax on foreign workers and the end of the 457 visa scheme. The 457 visa is being replaced by a temporary skill shortage visa, but the intention seems to be to reduce foreign workers numbers.
  • The office market in Canberra is likely to be a beneficiary from the Budget. Office demand in Canberra is usually correlated with Government finances. The 2017/18 Budget is a re-election Budget and a range of measures such as the new Infrastructure and Projects Financing Agency should flow through to stronger office demand in Canberra.

Investment demand for Australian commercial property is likely to remain strong and possibly receive a boost from measures that increase superannuation contributions such as the First Home Buyer Super Saver Scheme and ‘downsizing’ non-concessional contributions for older Australians.

Retail

Mixed news for the retail sector. Employment growth is expected to remain soft though wages growth should pick up a little. Consumer sentiment is likely to be buffeted by the positives of infrastructure spending offset by factors such as a higher Medicare levy, though should receive a net gain, depending on how easily the proposals pass through the Senate.

If you are in the market for an residential or commercial investment property you should consult one of the experts at Performance Property Advisory.

Find more details on the budget here