How will the 2017 budget impact property investors?
Federal Treasurer Scott Morrison delivered a budget with some surprising changes of direction politically and economically. He cast a wide net over many sectors, with property investment being one of the main targets.
Mortgage Choice CEO, John Flavell, says that overseas property investors are always an easy target for the Government.
"Unfortunately though, I don’t think the Treasurer’s plan to limit the level of foreign investment approvals on new developments will drive the result the government craves," he says.
"Furthermore, the government’s Ghost tax was a good idea in theory, but I think it is spooky just how soft this tax actually is. All of the changes made in this area are unlikely to substantially reduce the level of demand coming from international property investors."
"Finally, all of the property investor adjustments were largely fringe-based changes. In Australia, almost 40 per cent of all loans are written for investment purposes. Indeed, over the last few years, Australia has fast become a nation of landlords – and these landlords are all voters. As such, we were never going to see the government do anything other than fiddle at the fringes of property investment policy," adds Flavell.
Here is our wrap on the main property-related highlights and how they may affect you.
Key issues left untouched
From a property investor's point of view, the budget was almost as notable for what it didn’t change, as much as what did change. The flashpoint issues of capital gains tax and negative gearing were high on the list of targets for those crusading on housing affordability, but despite all the pre-budget noise, these areas were largely untouched.
Negative gearing has survived to fight another day, so investors are still able to claim expenses and interest on debt as deductions.
There has been no tightening of capital gains tax rules for local property investors, so that they are still entitled to the 50 per cent discount on their CGT tax assessment if they hold the asset for more than a year.
There was even some positive news on the CGT front with the capital gains tax discount increasing to 60 per cent for investment in “affordable housing”, beginning 1 January 2018. The criteria to qualify as affordable housing are that the property must be aimed at low to moderate income tenants and rent must be charged at a discount below the private rental market rate. The property must also be managed through a registered community housing provider and held for a minimum period of three years.
Some deductions under attack
Up until now, those investing in residential rental property were able to claim tax deductions for travel expenses related to inspecting, maintaining or collecting rent. This will no longer be possible after July 1 2017. This is quite a hit for those who had bought property out of state, for example, and were able to claim airfares and rental cars as a deduction when they went to inspect the property.
Along with this, there will also be a tightening of rules on depreciation deductions for fittings and fixtures in investment properties. From July 1, only actual expense incurred will be deductible and not depreciation on existing fixtures and fittings.
Boost to those who are downsizing
Although the family home is strictly speaking not an investment, there were some budget changes that may impact the overall investment and income situation for retirees. From 1 July 2018 those over age 65 will be able to sell the family home and channel up to $300,000 from sale proceeds into their super with no work test or contribution limits applied. Better still, if the home is owned jointly by a couple then they can both make a $300,000 deposit into super.
The catch – you must have lived in the home as a main residence for at least 10 years.
This change will give many retirees some additional financial planning flexibility on the surplus cash left over after downsizing, by enabling them to take greater advantage of the favourable tax treatment within the super environment. It will still be important for retirees to do the sums, however, as there may be some assets test implications that may affect age pension entitlements.
Capital gains tax changes for foreign investors
For some time now, foreign property investors have been cited as one of the main contributors to overheating the residential property market by outbidding local home seekers. The government has taken a significant step toward curtailing this problem through a range of steps.
Foreign investors will be unable to claim any main residence exemption on capital gains tax liabilities. Further CGT limitations will also be placed on them from 1 July 2017, with an increase in the withholding rate from 10 per cent to 12.5 per cent and a reduction in the threshold for CGT withholding from $2 million to $750,000. A charge is also being brought to discourage situations where a foreign investor buys a property but leaves it unoccupied or does not make it available for rent for at least six months per year.
What is your verdict on the changes affecting property investment? Share your thoughts below.