The latest budget just announced contains some specific items designed to address housing affordability in Australia – as well as maintain some protection and encouragement for every-day Mum and Dad, and first home owner property investors.
Nonetheless, newly announced laws will affect many investors – and it’s important that we are very clear about the impact of these.
There have been some changes to negative gearing that no one seems to be talking much about. This has been snuck in without much fan-fare, but it does affect property investors with established properties quite significantly.
The key point in the latest budget is about new tax laws around depreciation
From 1 July 2017 property investors will only be able to claim plant and equipment depreciation deductions for outlays actually incurred by them. This means investors will not be able to claim deductions for items that were purchased by a previous owner of the property. These existing plant and equipment items will form part of the cost base of the property for the investor.
Within a residential property, items such as dishwashers, range hoods, hot water systems, security systems, smoke alarms, light shades, air conditioners, blinds and curtains, carpet, floating timber floors and ovens will be impacted. The total list is long at around 150 individual assets, and apartment complexes will have an even larger list with shared plant and equipment items such as lifts, fire indicator panels, swimming pool filters etc.
This means that if you’re not the first person to buy a property, there will be zero depreciation deductions attributable to the plant and equipment items. Since plant and equipment depreciate at higher rates than the building structure, that will have a big impact on your total deductions.
What is described as an integrity measure is a restriction on negative gearing
No one is talking about it much mainly because most agents are marketeers of brand new / off the plan property which is not affected by this. But investors trying to buy an established property are affected. Most people are unlikely to really understand how and why this works and why this is significant. Up until now that buying older style was often more viable because we were still able to make plant and equipment deductions on items that were, ‘pre loved’.
Ultimately, this measure is going to wipe off, depending on the property, anything between $2,000 – $4,000 from the tax claim you are likely to be able to make in the first couple of years of owning a property and a little bit less each year after that. Monetising this, it will probably mean, depending on your marginal tax rate and the age of the property itself, that it will cost you about $15- $20 extra to hold the property each week.
There were also significant new measures that will impact foreign investors
Here is an overview of the other key changes in the latest budget, through which the Government aims to address housing affordability, while at the same time continue to encourage property investors:
- First home buyers will be able to access up to $30,000 of their superannuation to put towards their first property. There will be tax incentives to reduce tax paid on these withdrawals from superannuation accounts
- From July 1 2018, GST on residential property will be paid directly to the tax office, rather than to the property developer as is currently the case
- Withholding tax effecting foreign residents buying or selling property will rise from 10 to 12.5 percent, and the threshold of this taking affect will drop significantly to properties costing more than $750,000 – as well as removing ‘main residence’ exemption for foreign and temporary tax residents
- A ‘ghost tax’ will be charged to foreigners who make a foreign investment application for residential property – this is for property not occupied or not available on the rental market for at least 6 months of any year
- The Government will remove tax deductibility for travel costs when visiting rental properties
- There will be reduced tax incentives for over 65’s in terms of superannuation contributions
- Measures that effect supply including planning and zoning reform is designed to increase the number of new dwellings, including the release of defence land, as well as more certainty around appropriate infrastructure within these new developments
- For owner occupiers looking to upgrade, financial incentives offered to older Australians to downsize will help in getting families into bigger homes
- Real incentives for institutions who invest in and provide social housing by offering them low cost access to loans will be provided
One consideration in the latest budget announcement is the focus on foreign investors. Developers in major cities like Sydney often rely on foreign buyers to justify their investment and validate new developments. With higher taxes and reduced incentives, this may well reduce the number of viable new developments, hence restricting supply in these major centres, and keeping prices up.
The good news for Australian investors is that the treasurer Scott Morrison says that investors will continue to be able to use negative gearing, retaining incentives for people to become property investors – while at the same time providing downward pressure on rents.
Our treasurer says that two-thirds of negatively geared landlords have a taxable income of $80,000 or less. In this he shows that, ‘Property investment is not just for the rich’.
We view these amendments to policy overall as positive – in both retaining incentives for local property investors – while at the same time helping first-home buyers and low income earners to get into the property market. Helping level the playing field, with higher taxes on foreign investors, re-enforces the Government’s stance in encouraging Australians to get involved in the property market, and take advantage of the remaining tax incentives for investors and first home buyers.
This budget supports low income and first home buyers, and helps insulate existing investors by retaining many of the tax incentives for them – but it will have an impact as outlined above.
The latest budget doesn’t contain any deal breakers, but you need to know how this affects you.