Last night the Treasurer handed down the Federal Budget for the 2017/18 year. This year’s Federal Budget was focused on health, home and housing. Keeping healthcare available to all Australians in the long term and living the dream of owning one’s home.
Click HERE for our Budget overview video.
Reduced residential property deductions
The Budget introduces integrity measures for deductions claimed by residential property investors.
From 1 July 2017, depreciation deductions on plant and equipment are limited to outlays actually incurred on residential properties. Broadly, these items include mechanical fixtures or those easily removed from the property such as dishwashers and fans.
For plant and equipment purchased after 9 May 2017, deductions are claimable over the effective life of the asset only by the investor who purchases the items. Subsequent investors of a property will be unable to claim deductions for existing plant and equipment, although the value of existing items will be reflected in the cost base for capital gains tax purposes.
For investors with existing investments as at Budget night, grandfathering rules will apply, allowing deductions on plant and equipment to continue until either the investor no longer owns the asset or the asset reaches the end of its effective life.
Rental property travel deductions no longer allowed
From 1 July 2017, the Government will no longer allow deductions for travel expenses related to inspecting, maintaining or collecting rent for residential rental property. However, where investors engage third parties such as real estate agents and property management services, those expenses continue to be deductible.
0.5% increase in Medicare levy
From 1 July 2019, the Medicare levy will increase by 0.5% to 2.5% of taxable income, effectively increasing the top marginal tax rate (and the fringe benefits tax rate) to 47.5%. The increase ensures the National Disability Insurance Scheme (NDIS) is fully funded. The Temporary Budget Repair levy will expire on 30 June 2017 as originally announced in the 2014-15 Federal Budget.
GST on property transactions
From 1 July 2018, purchasers of newly constructed residential properties or new subdivisions will be required to remit the GST directly to the ATO as part of settlement. Under the current law (where the GST is included in the purchase price and the developer remits the GST to the ATO), some developers are failing to remit the GST to the ATO despite having claimed GST credits on their construction costs. As most purchasers use conveyancing services to complete their purchase, they should experience minimal impact from these changes.
Extending the immediate deductibility threshold for small businesses
The Government will extend their 2015-16 Budget measure Growing Jobs and Small Business — expanding accelerated depreciation for small businesses by 12 months to 30 June 2018.
Small businesses, with aggregate annual turnover of less than $10 million, can immediately deduct purchases of eligible assets up until 30 June 2018, provided the asset costs less than $20,000.
Assets valued at $20,000 or more can continue to be placed into the small business simplified depreciation pool and depreciated at 15% in the first income year and 30% each income year thereafter. The pool can also be immediately deducted if the balance is less than $20,000 over this period.
From 1 July 2018, the immediate deductibility threshold and the balance at which the small business simplified depreciation pool can be immediately deducted will revert back to $1,000.
Small business capital gains tax concessions
From 1 July 2017, the Government will look at modifying the small business CGT concession rules to ensure that these concessions can only be accessed in relation to assets used in a small business or ownership interests in a small business.
The Government has said that the revised rules will prevent taxpayers from accessing these concessions for assets that are not related to their small business by, for example, arranging their affairs so that their ownership interests in larger businesses do not count towards the eligibility requirements.
While the Government has not specifically detailed how the rules will be amended, they have said that they will not change the aggregated turnover threshold of $2 million or the maximum net asset value test threshold of $6 million.
First home super saver scheme
To reduce pressure on housing affordability the Government will allow voluntary superannuation contributions to be withdrawn for a first-home deposit.
- From 1 July 2017 an amount up to $15,000 per year of voluntary contributions (concessional or non-concessional) within the existing contribution caps can count towards this measure, up to $30,000 in total. Normal tax rules on contributions will apply.
- From 1 July 2018 these amounts can be withdrawn for a first home deposit up to the maximum of $30,000 along with associated deemed earnings.
- Withdrawals relating to concessional contributions will be taxed at a person’s marginal rate less a 30% offset. Non-concessional contributions withdrawn will not be taxed.
The measure is applied per person, meaning both persons in a couple buying their first home will be eligible to apply this scheme.
Additional super contributions for down-sizers
From 1 July 2018, people aged 65 and over will be able to make a non-concessional superannuation contribution of up to $300,000 from the proceeds of the sale of their home. Both members of a couple will be able to apply this measure allowing up to $600,000 per couple to be contributed to superannuation.
Contributions made under the downsizing cap will be in addition to any other voluntary contributions a person is able to make under the existing contribution rules and caps.
To facilitate this measure the Government will remove the existing contribution rules for those aged 65 and over making contributions under the new downsizing cap, including:
- removing the gainful employment requirement between age 65 and 74;
- removing the restriction on contributions from age 75; and
- removing the restriction applying from 1 July 2017 on non-concessional contributions by a person with a total superannuation balance of over $1.6 million.
This measure will only apply following the sale of a principal place of residence held for a minimum of 10 years.
It is important to note that while an amount may be able to be contributed to superannuation under the downsizing cap, the measure does not extend to amounts transferred into the retirement phase of superannuation under the $1.6 million transfer balance cap. A person will only be able to transfer up to their $1.6 million transfer balance cap into a retirement phase income stream.
The Government has confirmed that downsize sale proceeds contributed to superannuation will be counted under the Age Pension Assets Test.
This measure will provide significant additional flexibility to those retirees looking to structure income streams for their retirement.
Major bank levy
From 1 July 2017, the Government will introduce a levy for banks with licensed entity liabilities of at least $100 billion. The $100 billion threshold will be indexed to grow in line with nominal gross domestic product (GDP). Currently this will only affect the five largest banks but does not apply to superannuation funds and insurance companies.
The levy will be calculated quarterly as 0.015% of a bank’s licensed entity liabilities (for an annualised rate of 0.06%).
Importantly, the levy will not apply to deposits of individuals, businesses and other entities protected by the Financial Claims Scheme. That means that banks will not incur this cost on funds held by an individual of up to $250,000.
It is important to note that the policies outlined in this publication are yet to be passed as legislation and therefore may be subject to change or further refinement. Any advice in this Federal Budget Analysis has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on any advice, consider whether it is appropriate to your objectives, financial situation and needs.