Budget 2017

There were few surprises announced in the 2017 Federal Budget with big ticket infrastructure, health and education spending packages taking centre stage. A tax hit on the big five banks is expected to raise over $6 billion over the forward estimates. Our analysis takes a look at measures that will have the biggest impact on the financial plans and life goals of Australians. In the spotlight is a lift in the Medicare Levy, changes to superannuation designed to help people into their first home and new rules that could affect property investors.

It is important to remember this material relates to proposals that have not yet been legislated. Our analysis should be viewed in that context. We recommend you do not take any specific action until the Government provides greater detail in draft legislation.

TAX

Most taxpayers will pay 0.5% more

From 1 July 2019, most taxpayers will pay more tax because the Medicare levy increases from 2.0% to 2.5%. The reduced cashflow could affect spending and investment decisions.

The revenue raised from this measure will ensure the National Disability Insurance Scheme is fully funded.


$20,000 expense write off extended for small businesses

Small business will welcome a one year extension to the immediate $20,000 business expenditure tax write off. The deduction was to drop to $1,000 on 1 July 2017. This has now been pushed out to 1 July 2018 to aid small businesses with turnover of less than $10 million. 


Medicare levy: Low income thresholds increased

The low-income thresholds for the Medicare Levy protect low income earners from the costs of the Medicare Levy. These thresholds will be increased for singles, families and single seniors and pensioners from the 2016/17 income year.


New thresholds

  • Singles: $21,655
  • Families with no dependents: $36,541 (Each dependent child or student: $3,356)
  • Senior and pensioner singles: $34,244
  • Senior and pensioner families with no dependents: $47,670 (Each dependent child or student: $3,356)

Super

Selling the family home could add $600,000 to your super

From 1 July 2018, retirees aged 65 and over can contribute some proceeds from the sale of their home into their superannuation accounts. The Government is seeking to incentivise older Australians to downsize - freeing up these homes for younger families.

Under the proposal a retiree can make a non-concessional super contribution (after tax) of up to $300,000 from the proceeds of selling their home. The property must have been their principal place of residence for at least 10 years.

The usual eligibility requirements for non-concessional contributions for people aged 65 and over do not apply. There is no requirement to satisfy the ‘work test’ and the contribution can be made by individuals aged 75 or more.

Am I eligible if I have $1.6 million or more in super?
The contribution is not restricted by the $1.6 million total super balance that takes effect on 1 July 2017.

How does it apply to couples?
The downsizing measure allows a couple to contribute a combined $600,000 to super. 

Other implications
Those eligible will need to consider their overall personal tax position as it may be more tax-effective to invest outside superannuation. There are also estate planning and social security implications to consider.


New super saving scheme for first home owners

From 1 July 2017, the new First Home Super Saver Scheme will give individuals the ability to boost savings for their first home. The scheme is more attractive than earlier First Home Saver Accounts, as it allows people to build a deposit inside the highly tax-effective superannuation environment with pre-tax dollars - and to access the deposit sooner.

How does it work?
Individuals can make voluntary pre-tax contributions of up to $15,000 a year and $30,000 in total to their super fund.  Non-concessional contributions (after tax) can also be made.

The contributions, together with earnings made while in super, can be withdrawn to fund a home deposit from 1 July 2018. These withdrawals will be taxed ­ (excluding non-concessional contributions) at the individual’s marginal tax rate less a 30% tax offset.

How does it affect current contribution caps?
The downside is that these voluntary home saving contributions must be made within the $25,000 concessional cap – and that cap includes existing compulsory employer contributions.

Who is eligible?
The Australian Tax Office will be responsible for administering the scheme and determining eligibility. They will require the deposit be used to purchase an individual’s first home, calculate the amount that can be released, and instruct super funds to make these payments accordingly.


Changes to borrowing arrangements for self-managed super funds

The Government has addressed concerns that the Limited Recourse Borrowing Arrangements (LRBAs) commonly used to borrow within SMSFs may be used to sidestep the non-concessional contributions cap and the transfer balance cap.

These technical changes will make it more difficult for self-managed super funds to implement LRBAs.


Non-arm’s length arrangements restricted

From 1 July 2018, the non-arm’s length income provisions will be amended to reduce opportunities for members using related party transactions on non-commercial terms to increase their superannuation savings.

This will be achieved by ensuring that expenses that would normally apply in a commercial transaction are included when considering whether the transaction is on a commercial basis.

Income of the fund that is under the non-arm’s length income provisions is taxed at 45%.


Property

Annual charge for foreign investors with vacant property

To increase the number of dwellings available for Australians to live in, foreign owners of residential properties which are unoccupied or not available for rent for six months of the year will incur an annual charge equivalent to the foreign investment application fee imposed on the property. 

This measure applies to foreign persons who make a foreign investment application for residential property from 7:30pm (AEST) on 9 May 2017.


No more deductions for investment property travel

The ability to travel far afield to keep an eye an investment property, throw in a bit of a holiday on the side and then claim the cost of doing so as a tax deduction – apportioning the expenses accordingly, of course – will be a thing of the past.

From 1 July 2017, travel expenses related to inspecting, maintaining or collecting rent for residential rental properties will no longer be deductible.


50% restriction on foreign ownership of new developments

Foreign ownership in new residential property developments will be capped at 50%. This measure aims to ensure a minimum proportion of new developments are available for Australians to purchase.

The cap will be included as a condition on new dwelling certificates on applications made from 7:30pm (AEST) on 9 May 2017.


Capital gains tax toughened for foreign investors

The measures effectively make it more difficult for foreign investors to buy residential property in Australia. Conversely, the measures aim to make it easier for local residents to buy property.

The foreign resident capital gains tax (CGT) regime will be broadened by:

  • Denying foreign and temporary tax residents access to the CGT main residence exemption from 7:30pm (AEST) on 9 May 2017 – existing properties will be grandfathered until 30 June 2019
  • Increasing the CGT withholding rate for foreign tax residents from 10% to 12.5% from 1 July 2017
  • Reducing the CGT withholding threshold for foreign tax residents from $2 million to $750,000 from 1 July 2017
  • Applying the principal asset test on an associate inclusive basis for foreign tax residents with indirect interests in Australian real property from 7:30pm (AEST) on 9 May 2017


Plant and equipment deductions limited

From 1 July 2017, deductions for plant and equipment depreciation will be limited to outlays actually incurred by investors in residential properties.  Generally, these items include mechanical fixtures and items which can be easily removed, for example, dishwashers and ceiling fans.

This measure prevents plant and equipment items being depreciated by successive investors in excess of their actual value.  

If you have questions on how the Federal Budget could affect you call us on 1800 631 381 or leave your details below and a Perpetual adviser will be in touch.

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It is important to remember that this material relates merely to proposals which have not yet been legislated, and our analysis contained here should be viewed in that context. We recommend that you do not take any specific action until the Government provides greater detail in any relevant draft legislation.