The 2017 Federal Budget and Property Investors
So it’s been a couple of weeks since the Federal Budget was handed down. It still has to get through the Senate of course, but at least the dust has settled and we can now look at things objectively.
I have to admit, I thought it was a bit of a strange budget, for a Liberal Government. There was lots of spending, increasing taxes and smacking of big business. That is unusual for the Liberals but it seems to have gone down quite well with the overall electorate.
Either way, let’s look at the key components from an investing perspective:
Negative Gearing: Nothing changed. Despite all the hype, the Liberal government clearly realises that negative gearing is not the reason for the Sydney and Melbourne price boom. Remember, negative gearing was around way before 2012 AND it applies nationwide… so if Negative Gearing was the reason for the boom, why then did only the Sydney and Melbourne markets rise in value?
Secondly, offering people an alternate way to create wealth for their retirement means less reliance on pension payments and government funding in the future. If the Sydney and Melbourne markets continue to cool, as I expect they will, it will be interesting to see how much of an issue Negative Gearing is at the next election.
Capital Gains Tax: At the moment, if you own a property for more than 12 months, you get a 50% deduction on the amount of Capital Gains Tax you pay when you sell. There has been lots of talk about reducing this to help make prices more affordable. I certainly don’t understand how but thankfully there was no change here.
Foreign Investors: They are being smacked over the head with a sledgehammer. No other way to put it. They don’t vote and are easy fodder for a government. It will be interesting to see what the additional taxes, constraints and thresholds placed upon them will do to prices.
First Home Buyers: Well, this was supposed to be the budget that made homes more affordable. Yet, all First Home Buyers got was the ability to salary sacrifice into their Super to save a little on tax so they could save faster for their home deposits.
Let’s look at the numbers. Assume a new first home buyer is on a $60,000 income. If she saves the maximum allowed of $15,000 for 3 years, she would only be about $6,000 better off. Not sure if that’s going to keep up with house prices. Of course, it doubles if she does it with a partner but I’m still not sure that’s going to make much of a difference to First Home Buyers in our two biggest markets.
Other Deductions: From July 1, you’ll no longer be able to visit your property and claim it as a tax deduction. And the way depreciation is being calculated is now changing. Put simply, if you buy an existing property, you won’t be able to claim as much in depreciation as if you buy a brand new property. Check with your accountant to get more details on this but this should definitely go into your consideration about what property type of property you’re going to buy.
Bank Levy – This is expected to raise $6B in the next 4 years. We all know the banks can afford this but banks’ first responsibility is to their shareholders. Put simply, banks need to keep increasing their profits to keep shareholders happy – and a massive levy is going to affect profits, unless of course they pass the levy on to consumers. Sure the government is saying that the banks shouldn’t dare. Pity the government can’t stop the banks. If I was a betting man, I’d say, expect interest rates to rise.
So, what does this all mean for you the investor?
It means things are changing again in 2017. With rates set to increase, demand from overseas buyers expected to fall and changes in tax benefits, primarily depreciation, I would definitely be taking these factors into consideration.
My take in a nutshell – ensure you’re focusing on key capital growth drivers AND cash flow returns. If a property does not have a rental return of at least 4% or higher, I would not bother with it. Unless you’re on a massive income, your cash flow is going to hurt in the coming months and years.
Now is not the time to stick your head in the sand and do nothing, as you’re going to miss out on some great opportunities.
Neither though is it the time to head into the market blindly. As I’ve always said, Property Investing is a team sport so ensure you’re getting the right guidance.
If you’d like some assistance sourcing property in high growth locations that won’t cost you more than a cup of coffee a day, then find out how we can help
To Your Success,
November 13, 2020
November 4, 2020