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There was both good news and bad news for residential property investors in the May Federal Budget, some of which could affect their strategies and returns going forward.
The good news was that the government resisted the Labor party’s calls for a major overhaul of negative gearing, perhaps Australia’s most popular tax break.
The Federal government left negative gearing largely untouched when it announced the budget on 9 May 2017, but did make two changes to what property investors could claim as deductions for tax purposes.
The first was that investors who own a residential property some distance away from their homes or in another state can no longer claim any travel expenses from July this year onwards.
The move, part of a bid to cut down on possible misuse and abuse of the system, means that deductions for travel to inspect, maintain or collect rent on an investment property, including expenses such as flights or rental cars, will now be disallowed.
However, those wanting to diversify their property exposures across the country can still deduct expenses for using third parties, such as real estate agents.
Changes to deprecation deductions
Another change, which applies from budget night, was a new limit on depreciation deductions on plant and equipment, such as mechanical fixtures or items which can be “easily” removed from a property like dishwashers, air conditioners, stoves and ceiling fans.
For deals struck from the budget night onwards, deductions will be limited to outlays actually incurred by existing real estate property investors. In other words, property owners will no longer be able to claim deductions for plant and equipment bought and installed by a previous owner of the property.
That said, investors are still able to claim capital works deductions or “building write offs”, including capital works by a previous owner. These will be based on what the original construction work cost and not on what the investor paid to buy the property.
According to the government’s budget papers, this change 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”.
Promoting affordable housing
To encourage investment in affordable new and existing rental housing, the government has also announced that the capital gains tax discount for property investors in qualifying affordable housing will rise from 50 per cent to 60 per cent from 1 January 2018.
To qualify for the higher discount, the housing offered must be provided to tenants on low to moderate incomes, with rent charged at a discount below the private rental market rate. In addition, the affordable housing must be managed through a registered community housing provider and the investment must be held for a minimum period of three years.
Bonus for first-home buyers
The government also extended a helping hand to first-home buyers on budget night, announcing a new First Home Super Saver Scheme. It will allow would-be first-time home buyers to put up to $15,000 a year, up to a maximum of $30,000, into their superannuation accounts in order to save towards a deposit for a home.
Participants can salary-sacrifice into their super account, over and above their compulsory super contribution, and this could reduce their taxable income. Contributions and earnings in the super account will be taxed at 15 per cent instead of the person’s marginal tax rate and withdrawals will be taxed at their marginal tax rate, less 30 percentage points. Both members of a couple can participate in the scheme and can combine savings for a single deposit.
Foreign investor policy adjustments
Foreign investors, however, are set to be hardest hit by Federal budget’s changes. They will, for example, incur an annual charge of at least $5,000 for a property which is not occupied or genuinely available on the rental market for at least six months of the year.
In another moved aimed at boosting the housing stock for Australian buyers, developers will only be able to sell up to half of a new property development to foreign buyers. In the past, developers had to get pre-approval to sell properties to foreign buyers, but there was no limit on how much they could sell to these buyers.
Further to this, foreign investors will be denied the capital gains tax exemption on the sale of a main residence and the foreign resident capital gains tax withholding rate will be raised from 10 per cent to 12.5 per cent. The threshold at which this applies falls from $2 million-plus to $750,000.
Do these changes affect you?
If any of these changes affect you, it’s best to talk to your accountant to ensure you fully understand the changes and have the best arrangements in place to overcome or maximise the opportunities from them.