Tuesday, 20 May 2014

Rap up what the experts say will happen with Property Investors with the 2014 budget


Federal Budget 2014: Homeowners and the property sector winners

HOMEOWNERS dodged a bullet in this year’s Budget, with multi-billion tax breaks failing to come under scrutiny.
Historically, real estate is a minor player during federal Budgets, with the industry managed more tightly under macro rather than micro positioning.
But as the magnitude of Joe Hockey’s austerity Budget became clear, the housing sector looked to be one of the most obvious sectors to stem tax leaks.
Among the potential pain points, there were fears the family home would be included in means testing for the aged pension, and that negative gearing would come under scrutiny.
With cost-cutting front and centre of Joe Hockey’s tough reforms, the $6 billion a year in lost tax revenue from negative gearing could have been a significant boost to Government coffers.
But projections in the Budget of rising unemployment may have kept property out of the firing line, at least for now.
All governments understand that joblessness poses a real threat to the property sector, reducing mortgage holders ability to service loans and bumping up defaults. An unemployment fallout doesn’t discriminate between first-home buyer belts and prestige property postcodes.
With negative gearing intact, investors can breathe a sigh of relief. But for how long?
The tax perk does little to boost housing supply and locks out potential buyers who are unable to compete with investors, so it deserves to come under the microscope.
Financial commentator David Koch says negative gearing is a perennial Budget consideration but the time is probably nigh when its rules will change.
“Given negative gearing doesn’t appear to be stimulating much in the way of new housing investment — the original intention — and we’re approaching the peak of a property boom, the timing of a change in future concessions is probably right,” Koch said earlier this month.
There were no direct hits on the family home in this Budget either.
The CGT tax-free status for owner-occupier homes remained untouched, and more significantly the family home was excluded in pension means testing.
The Commission of Audit had proposed to include the family home in the assets test from 2027-28, but tonight’s Budget statement was succinct; ‘The Government will not include the family home in the means test for the Age Pension’.
BRW property rich-lister Kevin Young said fears of its introduction had made buyers skittish in the Budget lead up.
“Some buyers still aren’t convinced this type of means testing won't be introduced. down the track. A couple I know are so frightened by it, they recently bought a home in Bali rather than Australia,” Young said.
He said a sell-off of family homes, investing in exempt assets classes, and local buyers switching to offshore real estate were just a few of the likely outcomes had it been an inclusion tonight.
The Budget predicts a surge in construction, so more stock coming onto the market may sof
The Budget predicts a surge in construction, so more stock coming onto the market will improve affordability. Source: Supplied

First-home buyers saving for a deposit have lost an incentive with the scrapping of the First Home Savers Account (FHSA) in the Budget.
The Rudd government initiative, introduced in 2008, provided people saving for a deposit with tax breaks and co-contributions from the government.
Under the scheme, savers paid concessional tax rates of 15 percent on interest earned in the accounts and the government made a 17 percent co-contribution on the first $6000 contributed each year.
The government co-contributions to the accounts will end on July 1 and tax and social security concessions will be withdrawn from July 2015.
Mr Hockey said the accounts were being abolished because their low popularity.
The Government expects to make $143 million in savings over five years from its scrapping.
Property’s peak national body the REIA had called on the Government toreview the amount of the First Home Owner Grant annually to maintain relativity with house price movements, but in this tough Budget that was unlikely to be a priority.
What’s more, the Government strongly outlined tonight that it expects interest rates to remain low in the medium to long term, creating less need for its intervention to boost housing activity.
The Budget also predicts a surge in construction, so more stock coming onto the market will improve affordability.
“The housing sector is beginning to respond to lower interest rates with a pick-up in prices and leading indicators of construction,” it said.
“These developments have contributed to an improved outlook for the household sector.”
Consumer reaction to the Budget will have an immediate impact on buying and seller activity, becoming apparent within weeks through auction attendance levels and clearance rates.
As the Government’s cost cutting flows through to household sentiment and the overall economy, the need for the central bank to tighten its macro policy will become less likely.

So at the very least, this Budget presents an upside for mortgage holders with its austerity keeping rates lower longer.


We were warned it was to going be the budget from hell but last night Federal Treasurer Joe Hockey declined to play the part of Godzilla – deciding to cut spending a little now and much more in the future.
Nonetheless, with headline numbers like an $80 billion reduction in government spending over the next decade, many are asking what impact the budget will have on property buyers and the market.
What impact the budget will have on property buyers and the market?

The economy

Ask any real estate agent and they will tell you that the overall economy has a big influence on the health of the property market.
While some feared a savage tightening, Hockey has restricted cuts to government spending to just 1.7% in 2014-15, with most of the pain shuffled to the ‘out years’ starting in 2016-17.
Economic growth is forecast at 2.5% next year, with unemployment rising from 5.8% now to 6.25% in 2015.
16,500 public servants will go mostly through natural attrition – a result unlikely to please anyone with an interest in ACT property.
Most of the pain will be in the health and education sectors but the heavy lifting has been shifted to the states, starting in 2017. So expect to see some tougher decisions closer to home later on – and perhaps a rise in the GST.


Families are the largest buyers of real estate in Australia, particularly in the middle and outer-ring suburbs of large cities and regional areas like south east Queensland.
Their spending power will be crimped a little with family tax benefit increases frozen from this year and FTB-B gradually restricted to households earning $100,000 per year.

The property industry

The new government foreshadowed that assistance to industry would be wound back and that’s exactly what they did – and the property sector was no exception.
The slow starting National Rental Affordability Scheme, designed to help build new homes for low and moderate income earners, has been frozen pending a review, and First Home Saver Accounts have been abolished along with a pilot scheme for seniors wanting to downsize their home.
Read more: What is the National Rental Affordability Scheme
The budget forecasts growth in private investment in housing at 7.5% next year, which seems a pretty optimistic number given it is more than double this year’s growth.
For Australia’s 1.9 million property investors, the budget brings a big sigh of relief – negative gearing survives intact.
Read more: How negative gearing works


Just as we predicted last September, road spending has been a big winner with multi-billion projects scheduled to proceed right around the country.
The most important of these include:
  • a North-South arterial road in Adelaide
  • WestConnex in Sydney
  • the East-West Link in Melbourne
  • a long overdue upgrade of the Bruce Highway in Queensland
  • a new bypass in Toowoomba.
road, Perth
But wait, there’s more. Thanks to the ‘infrastructure asset recycling program’, state governments will receive a subsidy equivalent to 15% of an asset sale if they plough the money back into new infrastructure.


There’s a final rub to the forecasting and future gazing, thanks to the Australian constitution.
Some of the measures announced last night  cannot be attached to the appropriation bills, which means that to take effect they must be approved by both houses of parliament in their own right.
Three of the most contentious – the paid parental leave scheme, the increase in petrol excise and the so-called deficit levy on high income earners – have already attracted public opposition from some of the Senators needed to pass them.
In other words, while we have a budget printed on paper, its final form hasn’t been settled yet – and there is plenty of politics still to come. 


A Property Investor’s Guide To The Federal Budget

Michael Yardney About Michael Yardney
Michael is a director of Metropole Property Strategists who create wealth for their clients through independent, unbiased property advice and advocacy. He has been voted Australia's leading property investment adviser and his opinions are regularly featured in the media. Visit Metropole.com.au
There’s been lot’s of commentary about the budget in the last few days.

One of the best summaries comes from the Property Council of Australia who said:

The Abbott Government’s first budget outlines an economic blueprint to restore the nation’s finances to the black and invest in growth, underpinned by a $50 billion investment in infrastructure – including $11.6 billion for newly announced projects.
The Budget includes a series of cuts targeting welfare, health and industry assistance designed to return the budget to a surplus of $1 billion by FY2018.
It also introduces a two percent temporary ‘Debt Levy’ on personal income tax for individuals earning more than $180,000 per annum. The Government says temporary measure will be repealed from 1 July 2017.

The property industry is not exempt from the budget pain.

The Budget announces:
  • ending the National Rental Affordability Scheme (NRAS);
  • new pilfering of industry funds held in the Australian Reinsurance Pool Corporation; and,
  • scrapping of the Housing Help for Seniors program.
The cuts are offset by some promising initiatives, particularly in the infrastructure arena. These include:
  • Infrastructure Growth Package – delivering $11.6 billion of previously unannounced transport infrastructure;
  • an Asset Recycling Initiative – providing a 15 percent incentive for states and territories to offload assets to fund new infrastructure; and,
  • confirmation of key election commitments such as the $2.55 billion Emissions Reduction Fund, and a 1.5 percent reduction in the company tax rate.
The Budget is the first of the Abbott Government’s major reform statements.
More comprehensive reform is slated for tax modernisation and federal-state relations.

Infrastructure, strategic planning and growth

Infrastructure Growth Package
  • The centrepiece of the budget is the Infrastructure Growth Package which builds on the previously announced $39 billion Infrastructure Investment Plan.
  • $11.6 billion of new spending is allocated to transport infrastructure in the budget.
  • Major new investments include: acceleration of Melbourne’s East West Link; Adelaide’s North South Corridor; the Perth Freight Link; Toowoomba Second Range Crossing; and Western Sydney road upgrades to support Badgerys Creek.
  • Details of all projects slated for funding can be found at the Treasury website
Asset Recycling Initiative
  • $5 billion from the Infrastructure Growth Package will be allocated to the Infrastructure Recycling Initiative – aimed at incentivising asset sales by states and territories.
  • This program will be underpinned by a new National Partnership Agreement.
  • States and Territories will receive an incentive equal to 15 percent of the price of all public assets they divest.
Asset Recycling Fund
  • An ongoing Asset Recycling Fund will be established at the Commonwealth level.
  • This will be capitalised using remaining money from the Building Australia Fund and Education Investment Fund, with further contributions following the sale of Medibank Private.

Housing, retirement living and liveability

National Rental Affordability Scheme to be discontinued
  • The final round (Round 5) of the National Rental Affordability Scheme (NRAS) will not proceed – saving $235.2 million over three years.
  • Uncontracted funding from earlier rounds – or contracted funding that hasn’t been used within agreed timeframes – will be returned to consolidated revenue.
  • Funding for tenanted NRAS properties will not be impacted.
Housing Help for Seniors Programme – scrapped
  • Government will not proceed with the Housing Help for Seniors pilot program.
  • The program was introduced in last year’s budget to assist seniors downsize to age-appropriate housing.
  • A saving of $173.1 million over five years has been booked.
Taxation of retirement village loan liabilities
  • The Federal Government has confirmed it will carve out retirement village residential loan liabilities from tax consolidation changes announced in last year’s budget.
  • The original proposal threatened to tax retirement village income twice, where the ownership of a village changes due to a company acquisition.
  • The carve out will ensure retirement village operators are not subject to double taxation when a retirement village is acquired by a consolidated group.
  • This win is a direct result of Property Council advocacy. Taxation and public finance.
Company tax rate – 1.5% reduction from 1 July 2015
  • The Federal Government remains committed to cutting the corporate tax rate by 1.5% from 1 July 2015.
  • For large companies, the reduction will offset the cost of the Government’s proposed Paid Parental Leave levy, also to be introduced from 1 July 2015.
Foreign resident capital gains tax amendments extended
  • The former Government announced it would amend the capital gains tax rules to exclude intercompany dealings between members of the same tax consolidated group – this was relevant to determining whether an entity passes the “land rich” test.
  • The “land rich” test ensures assets are not inappropriately double counted.
  • It is good news that the proposal will now be extended to exclude intercompany dealings between members of unconsolidated groups.
Temporary Budget Repair Levy for personal income > $180,000 p.a.
  • The Federal Government will impose a 2% levy on individuals with taxable incomes above $180,000 per annum.
  • The levy will apply for three years, from 1 July 2014 to 30 June 2017, and raise $3.1 billion.
  • To prevent high income earners from utilising fringe benefits to avoid the levy, the FBT rate will be increased from 47% to 49% for the period 1 April 2015 to 31 March 2017.

Capital Markets, Finance & Liquidity.

MIT reforms – deferred to 1 July 2015
  • The Federal Government will defer the start date of the proposed MIT reforms by 12 months to 1 July 2015.
  • The purpose of the MIT reforms is to codify industry practice, provide certainty for the market and slash red tape.
  • The deferred start date will provide Government and industry additional time to consult on the measures and make the necessary administrative changes to implement the reforms.
Superannuation guarantee to increase to 9.5% on 1 July 2014
  • The Federal Government has confirmed that the superannuation guarantee rate will increase to 9.5% on 1 July 2014.
  • The superannuation guarantee rate will remain at 9.5% until 30 June 2018, after which it will increase by 0.5% each year until it reaches 12% in FY2023.

Eco-efficiency, climate change and resilience

Direct Action (the Emissions Reduction Fund)
  • The funding commitment of $2.55 billion for the Emissions Reduction Fund has been confirmed in the Federal Budget.
  • The Clean Energy Regulator and Department of the Environment will administer the scheme using existing resources.
National Climate Change Adaptation Research Facility (NCCARF)
  • The Budget confirms the Coalition’s election commitment to fund NCCARF for a further three years.
  • NCCARF will receive $9 million up to FY2017.

Governing smarter and efficient regulation

Reduced funding for corporate regulatory and tax administration bodies
  • The Government will cut funding for the Australian Securities and Investments Commission (ASIC) and the Australian Taxation Office (ATO) by $262.9 million over five years.
  • The Government will also conduct a review into the potential privatisation of ASIC’s registry function.
Tax compliance and data matching – deferred to 1 July 2016
  • Government will defer the commencement of its proposed third party reporting and data matching regime to provide further time to consult on the measures.
  • Unless amended, the proposed reporting regime will lead to the same information being unnecessarily collected by government agencies and businesses, duplicating time and costs.

Workforce, skills, industry productivity, innovation and security

Australian Reinsurance Pool Corporation
  • The Australian Reinsurance Pool Corporation (ARPC) – a government agency funded by the property industry to underwrite terrorism insurance – will be milked to the tune of $450 million over the coming four years.
  • This continues Labor’s malpractice of syphoning industry funds to plug budget holes. This reduces Australia’s preparedness for terrorist attacks.
  • Astoundingly, further $1.2 million will be allocated to a study looking at the role of the ARPC into the future.
Australian Building and Construction Commission
  • The budget provides $34 million for the coming year to fund a much needed boost to the capacity of the Australian Building and Construction Commission (ABCC).
  • This delivers on a key election commitment to enable this cop on the beat to stamp out illegal union activity on construction sites.
Royal Commission into Trade Union Governance and Corruption
  • The budget allocates $53.3 million to the Royal Commission into Trade Union Governance and Corruption.
  • The Royal Commission will look closely at the conduct of trade unions in the building and construction industry.
  • The Royal Commission is scheduled to report by 31 December 2014.


What the Budget means for your investment property

Posted on Wednesday, May 14 2014 at 12:19 PM
Do you currently own a blue-chip apartment or a three-bedroom pad in the suburbs? You can breathe a sigh of relief – negative gearing wasn’t axed in the latest Federal Budget.
Homeowners planning to sell their principal place of residence also won’t have to pay capital gains tax (CGT). At the moment, if an investor sells an investment property, CGT is calculated. But the family home is the only property exempt from this tax and will remain so for the foreseeable future.
Another huge win for investors is the fact that interest rates are likely to remain low for some time, with inflation forecast to hold steady at 2.5 per cent for the next few years.
Steve McKnight of Property Investing says it’s hard to see where the pressure for significant interest rate increases will come from.
“Real estate investors have good cause to believe that home loan interest rates will be stable at current historical lows for some time yet,” he says.
Investors trying to enter the booming Sydney and Melbourne markets, and other capital cities for that matter, might also find prices start to stabilise.
McKnight believes the Budget will probably lead to a dip in consumer confidence and less spending in the short-term.
“As such, this will put something of a wet blanket on the property market until at least spring,” he says.
“The biggest impact is going to be in Canberra (where there will be job cuts to public servants.) ACT homeowners and investors need to consider their property positions and take corrective action now.”
However, investors thinking about purchasing a National Rental Affordability Scheme (NRAS) property down the track will have to choose another option. That’s because the government will be discontinuing round five of the NRAS Scheme, saving $235.2 million over three years.
“Since its establishment in 2008, NRAS has delivered 14,575 new homes for low and moderate income households and was on track to provide 23,8884 more,” Urban Development Institute of Australia national president Cameron Shephard says.
The scheme will remain in place for investors who already own NRAS property and funding for properties already tenanted won’t be impacted. However, uncontracted funding from earlier rounds, or contracted funding that hasn’t been used within agreed timeframes, will be returned to consolidated revenue.
Shephard admits NRAS became too bureaucratic and administrative but he believes there would have been other solutions, rather than scrapping the program.
“They’ve thrown the baby out with the bath water,” he says.
“We suggested to keep the scheme but make it more efficient. Now the Federal Government is walking away from any sort of public housing and we think that’s wrong.”
The government has also ditched the Housing Help for Seniors program. The program was introduced in last year’s budget, to assist seniors who wish to downsize their home. The axed program saves $173.1 million over five years.
Executive Director of the Retirement Living Council Mary Wood says it’s disappointing.
“Senior Australians should be allowed to choose homes that allow them to age in place, but the scrapping of the Housing Help for Seniors creates less housing choice and puts more pressure on residential aged care and the taxpayer,” she says.
“However, we congratulate the Federal Government on a positive initiative that will no longer subject retirement village operators to double taxation if ownership of a village changes because of a company acquisition.”
The First Owners Saver Accounts, which helped first homebuyers save for their first home, was another scheme scrapped by the government.
But investors keen to use a Self-Managed Super Fund (SMSF) down the track to purchase an investment property might soon have more funds to do so.
There will be an immediate increase in the superannuation rate from 9.25 per cent to 9.5 per cent, from July 1 this year. It will increase by 0.5 per cent until it reaches 12 per cent in 2022-23.


Real estate associations and economists sit on different sides of the fence on the rumours the government will reform Australia’s negative gearing rules in the 2014 Budget.

There have been reports the government will amend the controversial rules, by grandfathering arrangements for existing investors and only allowing negative gearing on newly constructed dwellings.

Both the Housing Industry Association and the Real Estate Institute of Australia (REIA) believe any change to negative gearing would impact on the supply of housing and the level of rents in an already tight rental market.

“To amend the current negative gearing provisions for housing would be treating real estate differently to other asset classes, create a distortion on the investment landscape and result in a resource misallocation,” REIA president Peter Bushby said.

“The view that negative gearing is for wealthy investors is a myth. ATO data shows fewer than 80% of the total individual taxpayers that are claiming a tax deduction for property earn less than $80,000 a year.”

He believes a change to negative gearing could result in rents rising by more than 4%.

RP Data’s Cameron Kusher said negative gearing is in place to encourage developers to build new rental accommodation and private individuals to act as landlord for those who are not in a position to own their own home.

“While it would make sense to apply negative gearing only to newly constructed properties, politically it would likely be unpopular. Furthermore, if negative gearing was to be removed the government would likely have to play more of a role in constructing new homes and managing a portfolio of properties.

“On balance, they probably see that foregoing almost $8 billion in taxation revenue is more cost effective than developing and managing a greater proportion of new housing stock,” Kusher said.

But according to Grattan Institute research, quarantining negative gearing losses would save the budget around $4 billion per year initially and fall to a saving of around $2 billion per year over the longer term.

Its report also showed that negative gearing was not producing much-needed new affordable housing.

Economist Leith van Onselen has argued many times on his blog against retaining negative gearing, especially on the grounds of rental supply.

“A large scale sell-off by investors would be met by purchases from renters (i.e. first home buyers). In turn, those renters would be turned into owner-occupiers, reducing the demand for rental properties and leaving the rental supply-demand balance unchanged,” he said.

Property Asset Planning managing director Brian Chant would also support changes to end negative gearing on established property and allow it only for new dwellings.