The Australian Federal Budget 2017: Getting into property and getting out of property, things from left field & investment in infrastructure.
Wow, has this budget got a deal for you!
You always want what you haven’t got. When you’re young you are thinking about schemes to get your access to your super money to buy a house and when you’re old you’re looking for ways to get it back into super. Trust us, we have dealt with clients at both ends of that spectrum.
We all know these new budget measures will do nothing for actual house price affordability in Melbourne and Sydney! That will be left to the dual devices of eventual oversupply and interest rates that will rise (one day). But it is an interesting feature of the budget nonetheless.
So, how does it work. Let’s focus on the first home buyers.
First Home Buyers
Our early read on the proposal looks like this:
From 1 July 2017, if you have not yet owned property in Australia, you will be able to salary sacrifice into your super, up to an additional $15,000 per annum (but still constrained by the overall $25,000 concessional cap) each year. This can later be withdrawn for a home purchase. The total that can be contributed as a First Home Super Saver Scheme contribution is $30,000.
So, how will it work in practice?
Julia is earning the equivalent of Average Weekly Ordinary Time earnings, which the ABS tell us is $79,721 per annum. Her normal Super Guarantee contributions from an employer would be $7,573, so she has $17,427 of ‘headroom’ before hitting the $25,000 concessional cap.
What she can put away into a deposit
Julia can put in $15,000 over the 17/18 financial year from her pre-tax salary. That $15,000 gets taxed on the way into super at 15%, meaning there is $12,750 left in her First Home Super Saver Scheme account.
The growth rate
The ATO will set the rate of growth that is allowed to apply, so that even if Julia’s superfund return was 10%, the ‘deemed’ rate of growth on the First Home Super Saver Scheme part of the account will only be 4.78% p.a.
What she can withdraw
So, let’s say that she now wants to withdraw the money on 1 July 2018, (the earliest date).
Firstly, there is a tax on the entire withdrawal. This tax rate will be her marginal tax rate, less a 30% rebate. Starting with the $12,750 net contribution, plus the deemed earnings of $609.45 (assuming the $15,000 went in on day one) the gross amount withdrawn would be $13,359.45.
This $13,559.45 is then taxed at her marginal tax rate1.
Tax on withdrawing the money
So, let’s assume Julia draws out the $13,359.45 on 1 July 2018.
It will add $13,359.45 to her taxable income for that year. So, assume she got a 2% payrise in line with AWOTE, and her salary is now $81,315. Income up to $87,000 is taxed at 32.5% + 2% Medicare, while income over $87,000 will be taxed at 37% + 2% Medicare.
So, Julia’s tax will be $1,961 on the part of the super withdrawal that took her up to $87,000 and $2,993 on the part that was above the $87,000 threshold.
Total tax would be $4,954.
Tax rebate to offset the withdrawal
But she gets the 30% tax rebate to offset some of that. The calculation for the rebate is $13,359.45*0.30 = $4,007.83. So she only pays a net tax of $946.17. Deduct that net tax off her withdrawal of $13,359.45 and we get back to a net of $12,413.28 that she has available for putting towards her first home.
How does that compare to her options prior to budget night?
Using the same set of assumptions, with her marginal tax rate of 34.5% including Medicare, her $15,000 after normal tax would have been reduced to $9,825. Assume she has made 2.5% interest on that, or a net of $160 after her 34.5% marginal tax rate, and we have $9,985 as a comparison amount.
So, $9,985 in net savings in the old world, or $12,413 in the new world. This makes her $2,428 better off. She can do this for up to two years, and if she has a partner who has also never owned a home, they can do this as well. But even at maximum savings over two years for a couple, the total benefit is less than $10,000 over two years.
Fact Check! Government says the scheme will make people at least 30% better off. Our worked example of Julia shows that she has $12,413 versus $9,985, so we make that a 24.3% boost to her savings.
I don’t think that is going to add too much fuel to the housing market, and I don’t think it is likely to do that much to boost Liberal party stocks with the ‘smashed avocado’ voters.
But it will annoy the heck out of the other superannuation funds!
You can imagine the feeling of masterstroke genius that must have gone through the mind of the person who dreamed up the scheme. One of the reasons that the Labor party’s version (First Home Saver Account) failed was that it was complicated, and the banks never really promoted the special accounts that were required for the deposits to go into.
In some ways it is genius to use an existing regulated vehicle, which almost every Australian tax payer has, to be the savings vehicle. However you can bet the software architects at the superfunds are spitting chips right now about the new coding they are going to have to write to accommodate this new type of contribution.
Ah well, never a dull budget!
Restoration of the Pensioner Concession card
Restoration of the Pensioner Concession card that was lost by age pensioners who lost pensions as a result of the 1/1/2017 asset test changes. Big tick of approval there.
People selling a home that has been owned for at least 10 years will be allowed to put in up to $300,000 into super. This allowance to override the age caps, the gainful employment conditions, and the contributions caps is great for financial planning, and reducing tax for older Australians. Expect some more devil in the details, and yet another condition that superannuation back office systems will need to accommodate, but this is a win.
However, in regard to this change making any contribution to releasing housing stock; we are calling that wishful thinking. It may release a few highly valued properties onto the market that are owned by people who likely do not now, nor ever will in the future be eligible for age pension. But beyond that, the family home is still the only place (oh, other than funeral bonds) to legitimately ‘hide’ capital from the assets test.
For those who are getting a part pension due to the assets test, money kept in their own home as opposed to a bank account or superannuation, is earning the equivalent of 7.8% per annum, tax free, plus the rate of appreciation on the actual real estate.
As you can see, it is doubtful that the carrot of putting money into super, free of the thresholds will be the motivating factor in downsizing. But it is a nice option to have when the downsize decision has been made for other reasons.
Hit the five biggest ones with a new levy of 0.06% on bank liabilities that will raise $6.2 billion over the next four years. That will likely not do any favour to the share prices.
While at the same time opening up the field for smaller financial operators to become BANKS, without the need to hold $50M minimum capital, or have a maximum shareholder of 15%.
Combine this with the proposed financial services ‘sandbox’ that will allow start-ups to test their new fintech ideas on the public and you have a good recipe for all sorts of innovation. Hopefully it is good innovation!
Crowd sourced equity funding
Until now, a Proprietary company was only allowed to sell shares in itself to 20 people in a 12 month period. Under new rules mooted these small companies would be allowed an unlimited number of shareholders where they come on board via ‘Crowd Sourced Equity Funding’.
Not to be outdone by the Trump promise to make America great again, our government also has a nation building agenda. A 1700 kilometre rail line from Melbourne to Brisbane was just one of the announcements. House prices in Whyalla should get a boost from that.
The swathe of infrastructure projects announced means that fiscal stimulus can start to replace some of the monetary stimulus that up to now has been provided by the RBA keeping interest rates so low.
But wait, there’s more!
We have only scratched the surface on a few of the more newsworthy items. Look out for our future Blogs about the small business tax deductions, boosting affordability through investment tax incentives and more. If you can’t wait, and want the sterilised official version, you can read it here:
1 Please note that the calculator provided on the budget website; http://budget.gov.au/estimator/ is a bit dodgy. As an example, it has the correct figures for a person on $80,000 of income, noting that a $10,000 salary sacrifice would only see a $6,550 decrease in their take home pay. Yet when you reduce the slider down to $70,000 it shows that a $10,000 salary sacrifice would lose you $6,450 in after tax pay. That is perverse, as it implies a tax rate of 35.5%, whereas the tax rate including Medicare in that income bracket is only 34.5%