2017 Budget impact on property buyers

Hi all,

I recently joined this community and thought I'd contribute by sharing my summary of how the 2017 budget will affect property buyers. By way of background, I recently left my corporate job at a Big 4 bank and have started an independent mortgage broking business. I hope you enjoy the read!

Weekly Property Review - Friday 12th May 2017

Budget impact on property buyers

- First home buyers will be able to transfer up to $15,000 a year from their pre-tax income, into their superannuation funds to help pay for their deposit. The maximum amount allowed in the fund is $30,000. These contributions are taxed at 15%. The funds can be taken out from 1 July 2018 and will be taxed at the individual’s marginal tax rate minus 30%. Example from the budget - someone who earns $60,000 p.a. will be better off by $6,240 after three years.

- The Big 4 Banks plus Macquarie will be hit with a $6.2 billion levy which they say will be borne by customers, shareholders and employees. This may lead to further interest rate increases especially for property investors. However, borrowers have the option of talking to a mortgage broker who can direct them to other banks with better rates.

- Property investors with interstate properties will no longer be allowed to claim their travel expenses as a tax deduction. This has been removed because of misuse where investors have been enjoying holidays while visiting their investments.

- Investors are now only allowed to claim depreciation on plant and equipment (washing machines, dryers, furniture, ceiling fans, above ground pools etc.) if they purchased it themselves. In the past, investors could claim depreciation on these items if they came with the property.

- Property developers will only be able sell up to 50% of their project to foreign buyers.

- Foreigners will now be charged capital gains tax when they sell their principal place of residence, not just their investments. They will also need to pay a new annual “ghost tax” (at least $5,000 a year) if they leave their property vacant for more than 6 months in a year. State governments also have separate plans to increase stamp duty paid by foreign investors.

- Home owners aged 65 and over can tip $300,000 from the sale of their homes into their super to help encourage down-sizing and improve housing stock.

- No other changes to negative gearing benefits and capital gains exemptions.


Thanks,

Michael

 

What's your prediction?

 

My description of this budget:
Lets pretend to do something while actually not doing anything.

I was hoping to see some changes to negative gearing but nothing happened.

 

I think it will end at some stage, only Australia and NZ left that has negative gearing that offset income, another decade and the budget can't afford it

 

You don't consider a large change such as removal of depreciation and travel expenses a change to negative gearing? Plant and equipment is a relatively large non-cash deductions for many investors and will absolutely change the gearing outcome. It's a direct change to negative gearing and probably bigger than most realise given it's non-cash!

Budget depreciation change to slow the market: Louis Christopher

 

Unless you meant to write has negative gearing that offset personal income, then that isn't correct. In USA a property investor can deduct rental losses from other investment income such as property, stocks, interest etc. In UK and Canada you can deduct rental expenses from rental income but losses don't transfer over to personal income.

I note this fuss about negative gearing is to make property cheaper but UK and Canada don't have negative gearing and are still supposedly in property bubbles. Go figure!

 

The 50% limit on foreign sales means many new apartment projects that are about to start selling could be scrambling to find local buyers, especially those

by that same logic, does it mean our property market could do well even without negative gearing?

In which case shouldn't our gov just take away negative gearing and improve the budget deficit?
[When asked for sources to support Shorten’s statement, an ALP spokesperson said the Grattan Institute has estimated the cost of the capital gains tax and negative gearing concessions at $11.7 billion per year.

The Treasury’s tax expenditure statement (TES) lists the cost of the capital gains tax discount as $6.15b for 2015-16. The TES does not list the cost of negative gearing, but using Grattan’s total figure and subtracting the value of the capital gains tax discount, this shows that the cost of negative gearing is around $5.5 billion
]

After all we are still gonna end up with property bubbles and affordability issues. And if there are no supply problems in those other countries without negative gearing, could negative gearing perhaps be prolonging the supply problems we have here?

 

Conversely, removing negative gearing didn't help with supply or prices in those countries, so why would it fix the Australian property market?

My point is that instead of tilting at windmills, we should look at the real problems with supply: state government and local council artificially restricting supply through not zoning and releasing enough land.

TL;DR negative gearing is a red herring. It is neither the cause nor the solution to our affordability problems.

 

Yes the easiest way out of supply constraints is to just release more land, we have plenty of that even around Syd. and Melb. This needs to be tagged to immigration numbers.Not sure why this is not done.

The other thing is further clampdown on bank lending and foreign ownership. No point release more land and supply if its just gonna be snapped up by investors en masse. And no point making it easy for foreigners to come in and buy our land parcels and build apartments which are sold to their own investors from overseas.

good thing is as housing becomes too expensive, people get unhappy and politicians will have to make big moves to solve this problem or risk losing their voters lol. Liberal leaning to labour populist thinking now, perhaps BS and MT will become fast buddies soon.

 

My understanding is that Div 43 is being left alone and its Div 40 (Plant and equipment) is being changed.

As for travelling, that's a rort. How many people actually travel solely for the property?

 

Correct, but your post said you were expecting to see changes to negative gearing but nothing happened, when in fact a big and quite insidious change happened.

It's the biggest impact out of the two because unknown to many, division 43 allowances claimed during holding are deducted from the cost base for CGT purposes upon liquidation meaning it's not free money (in actual fact, technically this calculation should be made whether you claim it or not!). Of course, it should be claimed anyway as you claim 100% of the 2.5% (or 4% if your property happened to be built between 1985-1987) but you currently get a 50% CGT discount, in addition to inflationary considerations.

Whereas you can fully claim division 40 and it has no CGT implications meaning that is big loss (excuse the pun) to investors and large change to negative gearing in my opinion for a variety of reasons.

Agreed re the travel. That is immaterial but still a change to negative gearing.

 

Awww... that's not fair... why can't I continue to tax deduct visits to my beach house investment in Brisbane?

Perhaps I need to do one last tax deductible visit in June...

Misuse? What misuse?

 

So, Bayview, when you said



you actually meant it.

Welcome back. How's business?

 

This is where I see it differently. Maybe my understanding is wrong, but as i understood it, it means that the next person cannot claim for the item. The person who installed it can (while they own the property).

If anything it is simply stopping people from claiming more than they should. Closing a loophole really. Yes it sucks somewhat for those who are buying a near new property. Yes it is a change, but that big - in comparison to if they decided to limit negative gearing so that it could only be applied to investment income and not non investment income.

That said, I am basing this on my own experience. I had depreciation schedules done for complete new builds (granny flats) and also renovations (includes ones I've coordinated). This is the split between Div 43 and Div 40 (for Year 2)



The last one is an older unit that was renovated. Perhaps its the properties I come across... but it doesn't seem like a big deal to me if Div 40 was removed for new buyers. It wouldn't stop me from buying that's for sure.

 

reduce rampant immigration.

This is on the cards.

 

That is true but the point is that the next person buying the property (and thus the items inside) may be buying an air conditioner that is only 6 months old and will decline in value over the next X years (I can't remember the attribution off the top of my head) and then have to replace it. That decline in value is the write off. The point now is that the asset still declines in value and if the original owner had have kept it for the full X years, they would have had full deduction on it. The next owner owns it for (X-6months) years and gets zero - even though they will have to replace it with zero tax benefit for its decline.

Maybe there is something missing between our points here. We can have a chat on the phone if you like. I love discussing this stuff!

 

Because Brisbane doesn't have beaches?

 

No plant and equipment claim unless you add it yourself, can be a huge impact to gearing amount. I am thinking if that makes old homes more appeal and push up land value because investors would want an old home so they could add the values themselves?

 

The P&E not being deducible I agree and disagree with.

I agree as there are many people who buy a house that is 20 years old and it has a 20 year old dishwasher but when they get the depreciation schedule it is now a $1,500 dishwasher and is depreciated... This is clearly not what depreciation was meant to do/be but if a quantity surveyor doesn't include the 20 yr old one and another one does who gets more work?

However I disagree because lets say someone now buys a 2 year old house and it did have a $1,000 dishwasher in it there is still some 'value' in it however now it is no longer depreciable. On my most recent purchase the vendors had spent about 100k renovating the property, it was all brand new inside with meile appliances. They were not a flipper but rather they were Chinese and were going to live in the property so everything was with high finishes including solar on the roof but after they did their renovations they pretty much had to move back to China due to family. They bought the house 2 years before we did so the renovations are at max 2 year but likely about 1 year (REA said 1 year).

From the deprecation schedule there was about 27k in P&E for the first 5 years which an investor would no longer be able to claim (not looking at selling). Yes my dishwasher has been listed at $1,500 which I think might be over inflated as the dishwasher is just over a year old, however I know people who get this from a 20 year old dishwasher as it simple had a dishwasher.

This is the people that it is hurting, the people who bought unrenovated properties and got over inflated prices the time is up and you shouldn't of been claiming this anyway and maybe then the government wouldn't need to make this as a change.

I couldn't find any recent data in my 30 seconds but lets say 50% of the 1.2M investors (source below) that claimed NG were claiming over inflated figures by an average of 25k each in the first 5 years. The saving to the government at 33% tax is 5Bn... even dropping it to 10k avg would be over 2bn.



These figures can blow out crazily with 80% claiming 25k over and at 50% tax rate as it would be over 7.5bn.

Source for 1.2M NG - There were 1,213,595 individuals with a negatively geared property over the 2010/11 financial year

I am not actually effected by the change as the purchase and settlement happened way before the budget announcement but it will effect me on future purchases so it could be the minority ruining it for the majority or the majority ruining it for the minority.

 

I believe the desired ongoing effect of removing plant and equipment depreciation, for those investors who buy previously occupied (existing) properties, as a push towards investors buying new properties. This should make it easier for first home buyers and owner occupiers to acquire existing properties as they should not be competing with as many investors (because such properties are now less attractive for investors who will miss out of thousands of dollars in plant and equipment tax depreciation deductions over the first few years of ownership).
Hard to say whether this will see a reduction in the value of existing properties. Areas of the country which have seen a significant boom in recent years are more likely to notice a reduction than areas which are still waiting for the boom to kick in.