2017 Federal Budget Analysis

FEDERAL BUDGET 2017 INDEX

Medical

1.1   Strengthening Medicine

1.2   Affordable Medicine

1.3   Health Australia

1.4   Medical Research

Tax Rates and Assets Write off

2.1 Personal Income Tax

2.2 Assets write off

Property

4.1 Affordability

4.1.1 Removal of main residence for foreign investors

4.1.2 Expanding the CGT withholding regime

4.1.3 new levy for foreign owners who leave their residential property vacant

4.1.4 new 50% cap on foreign ownership of residential developments

4.1.5 assisting first home owners accumulate a deposit inside superannuation

4.1.6 increasing the CGT discount from 50% to 60% for investment in affordable housing

4.2 GST

4.3 Travel Expenses – residential rental property

4.4 Depreciation – Plant and Equipment – residential rental property

Superannuation

5.1 Downsizers contributions to superannuation

5.2 SMSF Borrowings

Higher Education

6.1 Higher education reforms

MEDICAL

TAX RATES

There are no changes to personal income tax rates in the Budget. This means that the 2% Temporary Budget Repair Levy will end on 30 June 2017.

The following individual income tax rates for Australian residents will apply for the 30 June 2017-18 income year:

Due to the removal of the Temporary Budget Repair Levy from 1 July 2017, the effective top marginal tax rate for the 30 June 2017-18 income year will be 47% including the 2% Medicare Levy (down from 49% for the 30 June 2016-17 income year).

The Treasurer announced the Medicare Levy would increase from 2% to 2.5% with effect from 1 July 2019 and low-income thresholds for singles, families, seniors and pensioners would be increased for the 2017-18 income year to take account of inflation.

Asset write off

The instant asset write off available to small business entities for eligible assets costing less than $20,000 will be extended for a further 12 months to 30 June 2018.

To be eligible for write-off under the higher threshold, the asset must be first used or installed ready for use by 30 June 2018.

Assets valued at $20,000 or more can continue to be placed into the small business depreciation pool and depreciated at 15 per cent in the first income year and 30 per cent 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 pool can be immediately deducted will revert to $1,000.

PROPERTY

Affordability

In this budget, the heavy lifting around housing affordability has fallen on those who lack an electoral voice. A raft of capital gains tax (CGT) and other measures aim to maximise revenue collection from foreign residents (and temporary tax residents). This may suppress investor confidence and demand for Australian residential property from foreign investors.

Measures specific to foreign investors include:

1. removing the main residence exemption – effective immediately – for non-residents and temporary residents, but with a two-year exemption for existing property until 30 June 2019.

2. extending the scope of the new CGT withholding regime, by reducing the threshold from $2 million to $750,000. Given the average dwelling price across Australia’s five capital cities of just over $825,000, the regime will now cover significantly more transactions. Coupled with an increase in the withholding rate of 10 per cent to 12.5 per cent, this should significantly reduce the risk of foreign investors failing to pay capital gains tax on property sales.

3. foreign investors who acquire residential property in Australia and leave their property unoccupied or unavailable for rent for six months or more each year will pay a levy of at least $5000 per year. This levy is to encourage foreign investors to make their property available for rent.

4. introducing a 50 per cent cap on foreign ownership in new developments, achieved by imposing additional conditions on New Dwelling Exemption Certificates.

5. First Home Super Saver Scheme - The Treasurer announced that, from 1 July 2017, individuals will be able to make voluntary contributions of up to $15,000 per year – and $30,000 in total — to their superannuation account to purchase a first home.

   Concessional contributions and associated deemed earnings will be taxed at 15 per cent. Non-concessional contributions will not be taxed, nor will withdrawals of non-concessional amounts. These voluntary contributions, along with associated deemed earnings, will be able to be withdrawn for a first home deposit from 1 July 2018.

   Withdrawals of concessional contributions and earnings will be taxed at the individual’s marginal rate less a 30 per cent tax offset.

   Both members of a couple will be able to take advantage of this measure to buy their first home together.

6. extending the CGT general discount from 50 per cent to 60 per cent on affordable housing. To qualify for the higher CGT discount:

1. the housing must be provided to low to moderate income tenants, with rent charged at a discount below the private rental market rate;

2. the affordable housing must be managed through a registered community housing provider;

3. the investment must be held for a minimum period of three years.

GST

Purchasers to pay goods and services tax on new residential premises

Until now, residential property developers have been responsible for remitting goods and services tax (GST) on sales of new premises to the ATO.

This is because the GST is included in the purchase price.

The government will now require purchasers of new residential premises to pay the GST on their purchase directly to the ATO, effective from 1 July 2018.

This will remove the developer from the equation. The reason for this measure is that some developers are failing to remit the GST to the ATO despite having claimed GST credits on their construction costs.

However, the practicalities of implementation are not clear.

One outstanding question involves the role of conveyancers. A potential solution could be to apply the current stamp duty collection model, where conveyancers or lawyers collect the stamp duty on behalf of the purchaser and remit this directly to the State Revenue Office.

Travel Costs -Residential Rental Properties

The Treasurer announced that deductions for travel expenses related to inspecting, maintaining or collecting rent for a residential rental property will be disallowed.

Taxpayers have:

•  been claiming travel deductions without correctly apportioning costs; or
•  claimed travel costs that were for the purpose of private travel.

The measure will not prevent investors from engaging third parties such as real estate agents for property management services, for which expenses will remain deductible.

Depreciation

The Treasurer announced that the Government will limit plant and equipment depreciation deductions to outlays actually incurred by investors in residential real estate properties.

This means that owners of a property will not be able to claim deductions for plant and equipment purchased by a previous owner of the property. The acquisition of these items will be reflected in the cost base of the property for CGT purposes

From 9 May 2017, only those investors who purchase the plant and equipment for their residential investment property will be able to claim depreciation deductions over the effective life of the assets.

Existing plant and equipment forming part of residential investment properties as at 9 May 2017 (including contracts already entered into at 7:30 pm (AEST) on 9 May 2017) will continue to be depreciated until either the investor no longer owns the asset, or the asset reaches the end of its effective life.

There is no change to the construction cost allowance or the depreciation of the building

SUPERANNUATION

There have been no changes to the legislation passed in November 2016. However, some new announcements are;

Contributing the proceeds of downsizing to superannuation

A person aged 65 or over will be able to make a non-concessional contribution of up to $300,000 from the proceeds of selling their home which they have owned for a minimum of 10 years.

The making of the contribution will be exempt from the age test, the work test and the $1.6 million total superannuation balance test, but will not be exempt from the $1.6 million transfer balance cap.

From 1 July 2018.

This measure will apply to sales of a principal residence owned for a minimum of 10 years, and both members of a couple will be able to take advantage of this measure for the same home, meaning $600,000 per couple can be contributed to superannuation through the downsizing cap.

The sale proceeds contributed to superannuation under this measure will count toward the Age Pension assets test.

These contributions to superannuation can be made regardless of how much you have in your superannuation account.

Integrity of limited recourse borrowing arrangements

From 1 July 2017, the use of limited recourse borrowing arrangements (LRBAs) will be included in a member’s total superannuation balance and transfer balance cap.

Currently, there is a concern that LRBAs can be used to circumvent contribution caps and effectively transfer growth in assets from the accumulation phase to the retirement phase that is not captured by the new $1.6 million transfer balance cap.

To address this concern, the Government released — on 27 April 2017 — exposure draft legislation titled Treasury Laws Amendment (2017 Measures No. 2) Bill 2017: limited recourse borrowing arrangements, which is proposed to apply to self managed superannuation funds and certain funds that have fewer than five members.

This measure will ensure that:

• the outstanding balance of an LRBA will now be included in a member’s annual total superannuation balance; and

• the repayment of the principal and interest of an LRBA from a member’s accumulation account will be a credit in the member’s transfer balance account.

HIGHER EDUCATION REFORMS

The Treasurer announced a higher education reform package, including:

• various programs to introduce greater competition amongst tertiary providers and improve educational outcomes, increase options for students who are less prepared for university, and expand opportunities for regional and rural students; and

• measures previously announced by the Minister for Education and Training on 1 May 2017, which included the following changes to the Higher Education Loan Program (HELP):

• increasing the maximum student contribution from 1 January 2018;

• phasing in an increase in fees from 2018 to 2021 — a 1.8 per cent increase in each year, cumulating to a 7.5 per cent increase by 2021;

• new HELP repayment thresholds from 1 July 2018 affecting all current and future HELP debtors by changing the timing and amount of their repayments:

• the minimum repayment threshold will be $42,000 from 1 July 201854 with a one per cent repayment rate55; and

• at the maximum threshold of $119,882, a repayment rate of 10 per cent will apply.

The Minister also announced on 1 May 2017 that from 1 July 2019, the indexation of HELP repayment thresholds — which is currently linked to Average Weekly Earnings — will align to the Consumer Price Index (CPI).

Valuing Higher Education

The Government is rebalancing the shares of the cost of higher education. From 2018, students will contribute an additional 7.5 per cent, to be phased in over four years, which can still be met through the Higher Education Loan Program scheme, ensuring no student has to pay upfront.

This increased student contribution better reflects the lifetime benefits reaped by higher education graduates. The Government will remain the majority funder of higher education.

Fairness for students and universities

	A science student commencing a three year degree in 2018 will have their total fees increased by $1,000.
	A medical student commencing a six year degree in 2018 will have their total fees increased by $3,900.

Thank you for taking the time to read through this newsletter. We know it’s a lot of information to digest! If you have any questions at all, please contact the Bongiorno team on (02) 9326 2788.