The Government’s 2017 Budget had plenty of measures financial planners need to understand to help navigate their client’s goals, Richard Press writes.
Whilst the Federal Government’s 2017 Budget tried its hand on housing affordability, looked to reign in the federal government’s spending on tertiary education, and looked to have the major banks and large multinationals fund a raft of spending promises through new and increased taxes, there was still plenty in it that will allow financial planners to help their clients navigate the new measures targeted in the budget.
In housing affordability space, both first home buyers and old Australians thinking of downsizing, will potentially have the use of the concessionally taxed superannuation environment to help boost their financial position, be that entering the housing market, or reducing their exposure to this same market.
To assist younger Australians, save for their first home the Government has introduced legislation enabling super not just to be used as a retirement savings vehicle but also one that will help them fund their entry into the property market.
The First Home Super Saver Scheme (FHSSS) will allow first home buyers to contribute up to $30,000 towards a first home deposit, then later withdraw these proceeds plus the notional earnings as outlined below. This will allow them to benefit from the low tax environment of superannuation.
In addition to the contributions made under this scheme, notional earnings associated with those contributions will be able to be withdrawn. These associated notional earnings will be calculated as accruing at the rate of the shortfall interest charge which is currently 4.78 per cent per annum.
The Australian Taxation Office (ATO) will be responsible for administering the FHSSS. It will determine the amount a client can withdraw and will be responsible for ensuring the client uses the proceeds to buy their first home.
For older Australians (people aged 65 and over) looking to either downsize or leave the property market altogether the budget introduces legislation allowing them to contribute up to $300,000 of the proceeds (or $600,000 for a couple) into their super funds.
This is to apply from July 2018, and will apply to the sale of their principal residence. This non-concessional (after-tax) contribution will be allowed regardless of work tests or age limitations. The proceeds will count towards their Centrelink and Department of Veterans’ Affairs income and assets tests.
In addition to these measures, a number of proposals were made in relation to foreign investors in Australian residential property. These include:
A charge of at least $5,000 where a residential investment property is left unoccupied for six months or more a year. This is to take effect on investment applications made from Budget night;
The removal of the capital gains tax (CGT) main residence exemption for foreign and temporary tax residents. This will take effect from Budget night but existing properties will be grandfathered until the end of the 2018/19 financial year;
Increasing the CGT withholding rate to 12.5 per cent and reducing the threshold to $750,000 from 1 July 2017; and Foreign investment in new developments will be capped at 50 per cent.
It is hoped that these changes will assist in bringing additional housing into the market by restricting the amount of property “warehousing” by foreign investors, allowing first home owners better access to future new developments.
Stronger provisions have been proposed to ensure that transactions between a member of a super fund and a related party are kept to an arm’s-length basis. The provision, to apply from 1 July 2018, will ensure that “the non-arm’s length income provisions will be amended to ensure expenses that would normally apply in a commercial transaction are included when considering whether the transaction is on a commercial basis”.
The government said this measure is aimed at ensuring the 2016/17 superannuation reform package operates as intended.
External dispute resolution
The Government has proposed it will introduce a new dispute resolution framework that will empower consumers in the financial sector. There will be a new one stop shop – the Australian Financial Complaints Authority (AFCA) – for external dispute resolution and greater transparency of internal dispute resolution by financial firms.
AFCA will replace the Financial Ombudsman Service (FOS), the Credit and Investments Ombudsman (CIO), and the Superannuation Complaints Tribunal (SCT). It will be established as a company limited by guarantee and will commence operations from 1 July 2018.
There were several changes made to taxation system in the 2017 Budget.
It was proposed that the Medicare levy increase to 2.5 per cent from 1 July 2019. This will also increase taxes based on the top marginal tax rate inclusive of the Medicare levy, such as the Fringe Benefits Tax.
It has been proposed that this increase in the Medicare Levy be directed towards the support and guaranteed provision of the National Disability Insurance Scheme (NDIS). This means that one-fifth of the revenue raised by the Medicare levy will be directed to the NDIS
Savings Fund to fill the current funding gap for the Commonwealth’s contribution to funding the NDIS.
It would appear the government intends to remove the temporary budget repair levy of two per cent on the highest marginal tax rate (MTR) from the end on 30 June 2017. As there was no announcement in the budget indicating this measure would be extended it can be assumed that it will be discontinued.
The government has proposed that from 1 July 2018 income levels at which HELP debts must begin to be repaid will be lowered from $55,874 2017/18 to $42,000 in the 2018/19 financial year. The rate at which repayments must be made for higher income earners will also increase, with repayments increasing from four per cent of income, up 10 per cent of income, for those earning more than $119,881.
Currently, these thresholds are indexed in line with Average Weekly Earnings (AWE). It’s proposed they be indexed in line with the Consumer Price Index (CPI) from 1 July 2019.
In the 2015/16 Budget, the ability for small businesses to immediately write off depreciating assets was temporarily increased from $1,000 to $20,000. This increase was due to end on 30 June 2017, but has now been proposed to be extended until 30 June 2018.
Also, the laws that prevent small businesses from re-entering the simplified depreciation regime for five years if they opt out will also continue to be on hold until 30 June 2018.
Small businesses are defined as those with an aggregated turnover of less than $10 million.
New integrity measures are proposed to be introduced from 1 July 2017, to further ensure the small business CGT concessions only benefit genuine small businesses and their associated assets.
The Government will amend the small business CGT concessions with effect from 1 July 2017 to ensure that the concessions can only be accessed in relation to assets used in a small business or ownership interests in a small business.
This proposed amendment is targeted at taxpayers who are able to access these concessions for assets which are unrelated to their small business, for instance through arranging their affairs so that their ownership interests in larger businesses do not count towards the tests for determining eligibility for the concessions.
The small business CGT concessions will continue to be available to small business taxpayers with aggregated turnover of less than $2 million or business assets less than $6 million.
The budget also proposes a range integrity measures around investment property expenses.
From 1 July 2017, the Government will limit plant and equipment depreciation deductions to outlays actually incurred by investors in residential properties. Plant and equipment items are usually mechanical fixtures, or those that can be “easily” removed from a property such as dishwashers and ceiling fans. These changes will apply on a prospective basis, with existing investments grandfathered.
- Plant and equipment forming part of residential investment properties as of 9 May 2017 (including contracts already entered into at 7:30pm (AEST) on 9 May 2017) will continue to give rise to deductions for depreciation until either the investor no longer owns the asset, or the asset reaches the end of its effective life; and
- Investors who purchase plant and equipment for their residential investment property after 9 May 2017 will be able to claim a deduction over the effective life of the asset. However, subsequent owners of a property will be unable to claim deductions for plant and equipment purchased by a previous owner of that property. Acquisitions of existing plant and equipment items will be reflected in the cost base for CGT purposes for subsequent investors.
This is an integrity measure to address concerns that some plant and equipment items are being depreciated by successive investors in excess of their actual value.
From 1 July 2017, the Government will disallow deductions for travel expenses related to inspecting, maintaining or collecting rent for a residential rental property.
This is an integrity measure to address concerns that many taxpayers have been claiming travel deductions without correctly apportioning costs, or have claimed travel costs that were for private travel purposes. This measure will not prevent investors from claiming a deduction for costs incurred in engaging third parties, such as real estate agents, for property management services.
Conversely, the CGT discount on certain affordable investment properties is proposed to be increased to 60 per cent from 1 July 2018. In order to benefit from this concession, certain conditions would need to be met. These include:
Rent must be charged at a discount to the market rate;
- The housing must be managed through a community housing provider; and
- The investment must be held for at least three years.
Whilst there were no major changes to the social security system, there were several amendments made that will effect clients in this area.
The pensioner concession card will be reinstated for those who lost their pension as a result of the assets test changes that came into effect from 1 January 2017.
Any clients in receipt of the Age Pension, Disability Support Pension, Single Parenting Payment and several DVA payments received a one-off payment to assist with the rising cost of electricity. The payment was $75 for single recipients and $125 for couples.
It has been proposed that the maximum Liquid Assets Waiting Period will increase from 13 weeks to 26 weeks, effective 20 September 2018.
There has been a proposed tightening of residency from 1 July 2018 for those intending to claim the Age Pension or Disability Support Pension. The proposed requirements are as follows:
- Have 15 years of continuous residence in Australia;
- Have 10 years of continuous residence in Australia, with five years of this period being during their working life;
- Have 10 years of continuous residence in Australia without having received an activity tested income support payment for a total of five years; or
- Have become disabled in Australia (DSP only).
A new payment, the Jobseeker Payment will replace the Newstart Allowance and Sickness Allowance, from March 20, 2020. This new benefit will be set at the same level as the current Newstart Allowance.
A number of payments that are no longer available to new applicants are proposed be phased out. These include:
- Widow Allowance;
- Partner Allowance;
- Widow B Pension; and
- Wife Pension.
Those currently in receipt of these payments will be transferred to the Age Pension, or in a few cases the Carers Payment.
From 1 July 2018, the government proposes to apply a 30-cents-in-the-dollar taper rate to Family Tax Benefit (FTB) Part A for recipients with family income over the Higher Income Free Area ($94,316 currently).
The government has also proposed not to proceed with an increase to the maximum rate of FTB Part A announced in the ‘2015/16 Mid-Year Economic and Fiscal Outlook’. It has also proposed to freeze the rates of FTB for two years from 1 July 2017.
In a move designed to raise further revenue the government has a proposed a new tax of 0.06 per cent will be applied to the liabilities of banks meeting certain size criteria, with the effect that, initially, it will apply from 1 July 2017 to the five largest banks (ANZ, Commonwealth Bank, NAB, Macquarie, and Westpac).
The tax is expected to raise $6.2 billion over the forward estimates or around $1.5 billion annually. The tax will apply to corporate bonds, commercial paper, certificates of deposit, and Tier 2 capital instruments. It will not apply to additional Tier 1 capital and customer deposits protected by the Financial Claims Scheme (FCS). Large deposits (not covered by the FCS) would be subject to the new tax.
Richard Press is technical services manager at Fiducian Financial Services.